For early 401k withdrawals, do you have to withhold taxes at time of withdrawal, or can you just make estimated payments before the tax year is over?

[techguy]

I made an early withdrawal on my 401k in early 2017.  I didn't withhold taxes, because I didn't earn much income in 2016 (lived off savings as I left my salary job in 2015 to start new business).  Should I still make estimated tax payments to reach 20% withholding throughout the year?  Or will my tax be lower given my low income level in 2016?

[Critter]

Do I need to make estimated tax payments to the IRS?
https://ttlc.intuit.com/replies/3301891

[Critter]

https://ttlc.intuit.com/replies/3301730

[dmertz]

It seems that your 401(k) plan made a mistake by not withholding the statutorily required 20% (unless the plan was an IRA rather than a 401(k)).  Regardless, you'll want to make sure that your total withholding and estimated tax payments at satisfy one of the safe harbor requirements described above to avoid an underpayment penalty (or at least minimize the penalty if it's too late to make up for underpayment for the first 2 tax quarters of 2017).  With little tax liability for 2016, it may not take much to meet the safe harbor of 100% (110%) of your 2016 tax liability.

[techguy]

ah yes, thanks for the insight.  It was a 401(k), but then I rolled it into an IRA after my left my job.  So perhaps that's why I had the option to not set aside the 20% withholding.  It sounds like I might get hit with an underpayment penalty regardless, but I can try to minimize it through estimated tax payments for the remainder of 2017.  Thanks for your insight.

[Critter]

Ok .... so you rolled it to an IRA with in 60 days ... so now you will be taxed and penalized only on the amount you withdrew from the IRA.

[techguy]

Right.  I think I received some bad advice - because I didn't know to re-deposit the money within 60 days, so now I'll be taxed and likely penalized on the withdrawal amount on my 2017 return.  I'll just have to make as many estimated tax payments as I can in the remainder of 2017 to try to minimize the penalty.  Do you know if I just assume 20% of my withdrawal amount would be safe for tax payment? Plus whatever penalty the IRS would impose...

[Critter]

Use the program to calculate the estimated payments needed ... see the answer above for the links.

[fanfare]

You will be taxed.
If you meet the conditions in the second Answer, you don't have to make any estimated payments, since there will not be a penalty.
The 10% early penalty is fixed ; that is a separate issue.
BUT, estimated payments will spread out your tax burden.