IRA withdrawal tax and penalties: Any additional fees or taxes for not paying up front?
I just withdraw everything from my IRA: about K, and I'm willing to pay taxes and penalties on that, because I'm unable to invest capital effectively (I don't wish to invest in US stocks or dollar denominated bonds.)
I did not elect to withhold any percentage of my account balance for tax purposes. Would this create trouble for me come Apr 15th when I owe about K+ on my account in taxes, in terms of late fees, penalties, interest etc..? Or am I OK just waiting until tax day to pay my dues?
Any ideas / suggestions would be greatly appreciated.
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It is possible that you could be subject to a penalty for underpayment of estimated tax, but it depends on your specific situation. There are 3 exceptions to this penalty:
You owe under ,000 (looks like this will not be your situation), or
You have paid in 90% of the current year's taxes, or
You have paid 100% of the prior year's tax liability.
It looks like your best bet is to make sure you've paid in at least the amount that was calculated on your prior year's (2010) return.
If you have to pay in some extra taxes to reach that amount, it may be advantageous to adjust withholdings from salary (if applicable) rather than sending in an estimated payment. The reason this is safer is because the IRS tracks the date estimated payments are received, and could still consider your payment as "late." If salary withholdings are adjusted, the IRS does not look at when you paid those taxes. So, none of that adjusted payment would be considered late.
If salary withholdings do not apply to you, there is still an option to annualize your income on Form 2210. This documents to the IRS that your income was received unevenly through the year, and allows you to make payments based on when your income was received. Since you took your IRA withdrawal in August, this could help you to escape the penalty. It is not the easiest form to complete, so adjusting salary withholdings would be preferential, although any accountant (if you use one) can complete it for you.
For more information, see Publication 505, which you can find on the IRS website.
What kind of IRA? If it's a traditional IRA and the payments were pre-tax, then yes, you'd probably owe a boatload in taxes if you withdraw early. But if it's a Roth IRA, then you're only taxed/penalized on the earnings. You already paid tax on your contributions.
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