What should my withholding be for IRA withdrawal to pay medical insurance premiums?

[wuhoo]

I am looking to early withdrawal from my IRA to pay for medical insurance premiums, as they are considered an exception to the 10% penalty when unemployed for 12 weeks or longer.

https://www.irs.gov/taxtopics/tc557

When I go to my IRA provider online service portal to withdraw the funds, it asks for what my withholding should be. Should I be taking the default 10%, the actual margin tax rate as listed in the IRS W4-R form, or 0% since this would directly pay for the premium?

https://www.irs.gov/pub/irs-pdf/fw4.pdf

For example, lets say my insurance premium is $1k/month. For the IRA withdrawal, should I do:

1. $1k withdrawal - 10% withholding for $900 in my bank (leaving a $100 shortfall to pay the insurance premium)

2. $1k withdrawal - 24% withholding for $760 in my bank (leaving a $240 shortfall to pay the insurance premium)

3. $1k withdrawal - 0% withholding for $1000 in my bank

I feel like it should be 0% since it is going directly to the insurance premium, but I also know this is considered earned income. But then it seems like funny money if I instead take $1240 to account for the 24% withholding to pay the $1k insurance premium.

Thanks for any help!

[SusanY1 · Accepted solution]

If you want to ensure that you don't have a tax obligtiaon because of this withdrawal, you will want to "gross up" the amount of the withdrawl so that you can cover the ordinary income tax.  While you may be exempt from the penalty, you won't be exempt from normal income.  The custodians for many IRAs offer the option to select that you want "$1000" net meaning, after the 24% tax withholding.  

Depending on the other items in your tax return when you file at the beginning of next year, you could still have a balance due or a refund in excess of what you withhold here - but for this specific transaction taking a higher amount to cover the tax and the amount that you need for your insurance sounds like the right solution.