Source
r/tax•
fodder69

Tax Payments on IRA Withdrawal

Discussion

So I am planning to withdraw from an IRA for a house purchase and was curious about how other people have handled it. And I realize how expensive this is to take the 10% penalty and taxes when I am still earning but think GME play money and dream retirement property with plenty left in 401k and other IRAs after this.

Say I need $100,000 and assume the entirety of it is within the 24% federal tax bracket. I have to pay a 10% penalty, the 24% Federal tax and for me a 5.25% State tax. So I need to withdraw ~$166,000 total to get $100,000 after taxes, does that sound about right?

Do I have to pay that all as a lump sum when I withdraw, or can I pay it as quarterly payments? Or wait until I file taxes next year?

Part of me thinks as long as I pay 110% of my 2020 taxes this year, I can defer the taxes until next year which would help me spread out the withdrawals as I will most likely be in a lower tax bracket next year.

Posted Mar 1, 2021, 8:20 PM UTC

05
zbucklyo•

Not exactly correct calculations. You can withdraw $10,000 penalty free from an IRA if you meet the requirements to be a first-time homebuyer. However, in your example, that hardly makes any difference. And you are basically correct in the calculations, although I come up with slightly less. You don't have to pay it in a lump sum on withdrawal, although that is probably the easiest way to handle it.

The 110% you are referring to is the safe harbor exception which basically means that to avoid paying an estimated tax penalty for tax year 2021, you have to pay 110% of your 2020 tax liability in estimated taxes and withholding in 2021. It's a bit more complicated than that, since timing matters, but that is the general idea. If you spread out the estimated taxes evenly throughout the year (quarterly) based on, you will avoid a penalty.

Unclear as to why you wouldn't take capital gains from GME to fund this (significantly less overhead from a tax perspective), but to each his/her own.

1
fodder69OP•

Sorry GME was just an example. The money is an IRA that I have been very lucky with over the last couple of years so I was just pointing out it was YOLO money to me. I'll edit that out since it is confusing.

Thank you for the advice.

1
cubbiesnextyrCPA - US•

You can take $10K for a first time house purchase. Beyond that, you'll be subject to all the taxes you noted.

The IRA will most likely withhold at least 10%, possible 20%. As long as you meet the safe harbor provisions for estimates, you can pay it all at 4/15 without penalty.

All that said, this is probably a bad idea.

1
fodder69OP•

Thank you, and yeah I was planning to withhold some at withdrawal just for sanity's sake.

And yeah I get that it is an expensive way to get the money, but I have done really well with this ira over the last couple of years and the property in question is exactly what I want and where I want it.

1
fodder69OP•

I know it's reddit, but I love when people downvote without commenting. Very helpful.

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