Penalty for early IRA withdrawal

[arlia673]

I need to take money out of my IRA but because I'm younger than 59.5 it will have the 10% penalty on it. The withdrawal calculator asks how much you would like to receive in your account and then has areas where you can fill in the tax percentages for state and federal taxes and then accounts for those in the withdrawal. So, for example, if you want to receive $500 it will take $615 out of your IRA to account for the "income" taxes. But it does not account for the 10% early withdrawal penalty.

My question is 2 fold: when do you get charged the 10% early withdrawal penalty? and is that 10% based off of the $500 or the $615?

[VolvoGirl]

The tax and 10% Early Withdrawal Penalty are based on the total gross amount taken out (before the taxes).  So on the $615.  At the end of the year you will get a 1099R to report it on your tax return.

You don't actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You have taxes withheld like from your paycheck. You still have to enter the whole gross amount (before taxes were withheld) with your other income to figure out the total tax (and it may put you into a higher tax bracket) and then the withholding is subtracted from the total tax to figure your refund or tax due. The Gross amount shows up on 1040 line 4a or 5a and the taxable amount on 4b/5b. The withholding will show up on 1040 line 25b.

It has to break out and show the 10% penalty separately on your return (schedule 2 line 8 which goes to 1040 line 23). Then you get credit for all the withholding taken out on 1040 line 25b.

You can lose like up to 50% of it due to federal tax and penalty and state tax.  So be very careful about taking it out.  There are several exceptions to the 10% Early Withdrawal Penalty you might qualify for.

[VolvoGirl]

What withholding percentages did you enter to figure a 500 net payment?  Just add another 10% to the federal percent.  Like if you put in 10 or 15% add 10 to it to be 20 or 25%.  

[arlia673]

The withdrawal website has a spot where you enter the amount of money you wish to receive ("How much would you like to receive (net, after taxes amount): $500). The next line is the adjusted amount that will be taken from your account based on the tax withholding percentages you enter (The amount taken from your account (gross, before taxes amount): $702.26). 

It was 6.8% for the state taxes and 12% for federal. If I increase the percentage to 22% to account for the 10% penalty, the amount withdrawn from the account goes up to $702 to receive $500. But then doesn't that increase the 10% penalty? Instead of owing $61.50, you would then owe $70? Wouldn't that cycle never end? Or am I just way overthinking this lol 

[VolvoGirl]

No, that website takes that into account, that's the point.    It's just like the federal and state tax.  The 10% penalty is a flat fixed amount.  Just like the 12% for federal.  That's nice the website calculates it out for you.  So you don't have to figure it out yourself.  Even though the penalty is a fixed 10% of the gross the federal and state withholding amounts are just estimates.  The actual income tax will be based on your total income.  

Hope that makes sense.