IRA Tax withholding question

[Katsmeow]

DH is going to rollover money from his 401(k) account directly to an IRA. I know that if done directly there is no tax withholding on it.

He will then a month or so later, withdraw some of the money in the IRA to use to purchase some property.

Is tax automatically withheld when you withdraw from an IRA (never done that before)? We know tax will be owed but don't want it to be withheld at that time if it is not mandatory.

 

[kaneohe]

Withholding is optional for IRAs but you should talk to your institution as they may have a default action if you do not specify. Schwab recently made a change so you can't withdraw funds w/o a written election. Don't know if that is universal.

 

[RE2Boys]

And you may need to do estimated tax payments to avoid penalties for underpayment of taxes. Of course, that will depend on your individual situation. Hope your husband is over 59.5 years old to miss any withdrawal penalty.

 

[Gearhead Jim]

My tax man says that if money is sent DIRECTLY from the IRA custodian to the IRS, before the end of the year, you don't need to make quarterly or estimated tax payments.

 

[frayne]

Is tax automatically withheld when you withdraw from an IRA (never done that before)? We know tax will be owed but don't want it to be withheld at that time if it is not mandatory.

Off the top of my head I would say you have the option of having tax withheld but as others mentioned if you aren't 59.5 years of age you will owe Uncle Sam a 10% penalty as well as regular income tax and you may trigger the requirement of having to make estimated quarterly payments in the coming tax year.

 

[FinanceDude]

With most custodians, you have the option of them withholding money based on you telling them how much, or not withholding at all and handling it with your taxes at the end of the year.

Why would he take money out of an IRA to purchase properties, with today's low cost of money, it might be wiser to avoid the taxes

 

[Katsmeow]

He is over 59 1/2 so no 10% penalty. Would not do it if he was under 59 1/2. He plans to retire later this year. We understand about estimated taxes.

Why would he take money out of an IRA to purchase properties, with today's low cost of money, it might be wiser to avoid the taxes

You must have missed the long thread on this issue. See thread on house conundrum. Suffice it to say that we already are paying on a mortgage and felt it best not to take on a second one. Most of the money for the purchase is coming out of non-retirement accounts.

 

[homestead]

I just did this last month, called Vanguard and they called my 401k company
while I was on the line. The 401k company sent a check directly to vanguard and there was no withholding or taxes. Took a 3 or 4 days til the money showed up in vanguard ira.

 

[LOL!]

Why would he take money out of an IRA to purchase properties, with today's low cost of money, it might be wiser to avoid the taxes

FinanceDude is talking about taxes because your AGI goes up by the withdrawn amount. He is not talking about the penalty.

Note that the money coming out of non-retirement accounts is probably not taxed at all. This would be true if you sold something and realized a capital loss. Return of capital is tax-free.

 

[Katsmeow]

Yes, of course I understand about the taxes...other people were talking about the penalty and was responding to them on that point. The whole other thread I had was about the tax issue and considered seriously taking a loan but decided not to in the end. As it turns out most of the money to buy it is coming from non-retirement accounts so not a huge issue.