If I don't withhold any taxes for my traditional IRA, do I withhold it when I do my taxes next year?

Question

I had a small traditional IRA, about $3000, that I just closed last week. I'm 26 years old. I didn't withhold any taxes because I wasn't sure whether or not I had to. I closed it without withholding any, so when I have to do my taxes next year, what do I have to do? Is 10% automatically going to get deducted from my return? I don't want to get in trouble and I know a certain percentage has to go back, so just wanted to know what happens next. Any help appreciated. Thanks

Answer 1

When you pull money out of a Trad IRA before you turn 59 1/2, the federal government considers money pulled out as taxable income in the year it is pulled out. In addition to that, the IRS adds a second tax of 10% of the amount pulled out.

So, if you earned $40,000 in 2007, when you do your taxes, you'll add the $3,000 to the $40,000 (just like you would if you had $3,000 of interest from a bank, but on a different line of the 1040) to give you a gross income of $43,000. How this ultimately affects your taxes depends on all of your other income, deductions, etc. After calculating your taxes from the table, you will have to add an additional $300 (10% of $3000) to your tax liability.

You won't get into trouble...you'll just have to owe the money. I recommend putting this information on your 2007 tax return. Don't leave it off and hope the IRS "fixes" it. They don't like it when you file a return that is incomplete.

It is possible that you will owe the IRS "too much" and they may charge you interst. That is why it is always best to have the IRA people withhold 20% of the distribution. That being said, I doubt you will run into trouble with a $3,000 distribution. If it were $10,000 or more, then I would be worried.

The IRA people with will send you a form called a 1099-R in Feburary or March of 2008. If you do your own tax return, the software will ask if you pulled money out of retirement. Say, "yes", and enter the info from the 1099-R. The software will do the rest. If you have someone do your taxes, simply bring in the 1099-R with you. If you do your taxes by hand, enter $3,000 on line 16 or whatever line has "pension" on it...and put $300 on line 60 for "Additional tax on IRAs".

Some states also tax IRA pull-outs. CA is very similar to the IRS except their extra tax is 2.5%. PA taxes the pull-out, but does not add a penalty percentage. Consult with your local tax laws.

Exceptions:

If you put any money in the Trad IRA that was not deducted on a tax return (otherwise known as a post-tax contribution), you will not have to include that on line 16 or 60.

If you used the money for a qualifying event like excessive medical costs, purchase of a first home, disability, schooling, etc. then that amount is not subject to the extra 10% tax. It is still included on line 16 unfortunately.

Hope this helps :)

Answer 2

You will have to declare the amount on your return. You'll get a 1099-R for in January 2008. The $3200 will be taxable income, taxed at whatever your rate is, plus the 10% penalty. Nothing will happen automatically - you'll have to declare it. If you don't, the IRS will contact you since they will have received a report of it, and tell you how much additional tax you owe over what you had on your return - this might take awhile, even a year or more, and interest and penalties will accumulate during that time, and that could cost you a substantial amount extra for not taking care of it when you should have.

Depending on your tax rate and situation, you might need to make a quarterly estimated payment since you didn't have anything withheld, to avoid penalties for underwithholding.

Your other option is to put the money into a rollover IRA - then taxes will continue to be deferred on it and you won't owe anything until you take it out. You have 60 days after the money is distributed to roll it over.

Answer 3

I'm not sure what you're asking. If you closed an IRA the account custodian should have withheld 20% in taxes from the distribution. You don't "withhold" taxes but the bank or investment firm that the account was with certainly should have.

You will owe taxes in the entire distribution as ordinary income plus a 10% penalty. If nothing was actually withheld you had better set aside enough from the proceeds to cover your tax liability when you file your return next year.

Answer 4

once you're taking a distribution for a Rollover and you have Federal earnings Tax withheld, you additionally could make up the version out of your pocket, as long as you Rollover the comparable quantity it is dispensed to you interior 60 days, the IRS isn't excited with regard to the specific source of the money you Rollover. you additionally could make envisioned quarterly funds for the withholding taxes or in case you chosen to have it withheld you additionally could make it up on the Rollover ebook 590

Answer 5

Publication 590 explains early withdraw.http://www.irs.gov/publications/p590/ch01.html#d0e5343