10% IRA early withdrawal penalty question...

[nathstaxes]

Hi.

I have a Vanguard IRA and have been making some early withdrawals.

So far, I have elected to have Vanguard withold the 10% early withdrawal penalty tax.

However, I'd like to stop doing that and instead receive the full amount of

the IRA withdrawal (no withholding) and then pay the 10% penalty as a lump sum

when I file my taxes in April of next year.

Is this allowed?

The withdrawal amounts are a couple hundred dollars each month.

Thanks!

[Bsch4477]

You can instruct Vanguard not to withhold tax on your IRA withdrawal. 

[fanfare]

You don't need withholding on the 10% early withdrawal penalty

You do need withholding  or your own estimated tax payment on the gross distribution amount if you want to avoid incurring underwithholding penalties on Tax Day.

[nathstaxes]

Thank you for taking the time to reply.

So, I'm going to be withdrawing about $250/mo for the foreseeable future.

I can't find online if I opt to NOT have Vanguard withhold the 10% tax,

will say $1,500 of early IRA withdrawal for the 2024 calendar year trigger

a penalty for under-withholding like you mentioned?

Thanks!

[fanfare]

Probably, yes.

[fanfare]

Don't confuse the incom tax on your withdrawal with the penalty tax on your early withdrawal

[Opus 17]

Remember that you will owe regular income tax PLUS the 10% penalty.  The total tax could be between 10% and 36%, depending on your other income and tax situations.  Don't forget you will also owe state income tax on the withdrawals (3-13%, depending on your state and income level).

The tax system is supposed to be pay-as-you-go, and you are supposed to have withholding or make quarterly estimated payments.

https://www.irs.gov/taxtopics/tc306

If you owe more than $1000 when you file your tax return, you can be assessed an underpayment penalty of 1-1.5% per month of the amount you were supposed to have paid.  

[VolvoGirl · Accepted solution]

And about the tax that is withheld on the IRA distributions.  It isn't designated for the 10% Early Withdrawal Penalty.  It is just withholding towards your total tax due including any penalties.

You didn’t actually pay the tax or the 10% penalty (you pay a 10% early withdrawal penalty if you are under 59 ½). You had 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.