Calculating taxes for traditional IRA withdrawals | Ed Slott and Company, LLC

Calculating taxes for traditional IRA withdrawals

How can I determine the amount of taxes to be taken out of a traditional IRA withdrawal. I have a IUL payment due and want to use the withdrawal to cover it. I am of the understanding that if I were to choose a Roth conversion its better to pay the taxes out of pocket. However, it utilizing the funds as an insurance payment its smarter to have the taxes taken out of the IRA withdrawal ... thank you.

You can gross up a needed TIRA distribution to allow for the amount of taxes you wish to have withheld, but in doing so you will incur taxes on the withholding itself. Therefore, it is usually recommended to already have enough in your non IRA savings to pay the total annual tax bill, and you can then avoid tax withholding. Of course, with a Roth IRA distribution, there would usually be no tax due and no need to increase the distribution. The downside of course is forfeiting future tax free Roth IRA growth. Note that if you are concerned about tax underpayment, if you meet one of the safe harbors (usually 100% of prior year tax liability), you will not be penalized even if you owe big next April.

I'm not sure I was quite clear. Instead of doing a Roth conversion with the TIRA withdrawal and paying the associated taxes from non IRA saving. I'm using the TIRA withdrawal to pay the premium on a IUL insurance policy thereby using it to avoid future taxation either for myself or my heirs. In doing the insurance policy payment I would have tax withholding included in the withdrawal to address not only the tax liability but reduce the total overall amount of my existing TIRA.I'm retired and turned 70 in Dec. of 2019. Since I don't have to take my RMD until next year. I wanted to advantage of reducing my taxable TIRA money this year. And, using the RMD's in the coming years to pay the insurance policy premiums.So, I was wondering how to determine the taxes on TIRA withdrawals to satisfy my income tax obligations. Also, I'm not sure I fully understand what the safe harbors you mention entails.

  • You could calculate your estimated tax liability for 2020 using the following site:
  • Of course, as the amount you need to have withheld increases, the taxes will also increase since the withholding itself will be taxable. Therefore, you will need to determine if you want to withhold just enough to avoid an underpayment penalty or to withhold even more so that you will not owe next April.
  • A safe harbor is the amount you need to withhold to avoid an underpayment penalty. If your taxable income will increase in 2020 over 2019, the safe harbor will be the amount of your 2019 tax liability (or if your 2019 AGI is over 150,000, then 110% of your 2019 tax liability). If your taxable income will drop in 2020, then your safe harbor can be 90% of your 2020 tax liability, but this requires knowing what your tax liability will be for 2020. The tax program link posted above will calculate that if you know the amounts to input.
  • Your withholding can be done anytime in 2020, including in December. You just need to determine the amount to withhold, which also affects your 2020 taxes. But if you come up short, it's not a big deal since the interest rates to determine any underpayment penalty are low, and due to the pandemic chaos, the IRS may well not even levy underpayment penalties for 2020.

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