Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

March 31, 2013
How much of early IRA withdrawal is subject to 10% penalty?

Q: My question has to do with the money I'm using from an IRA for all my closing costs on purchasing my first house. I'm looking to spend about $20,000. By taking money early from an IRA to buy a house, my understanding is that they only waive the 10% tax penalty on the first $10,000. That means anything I use beyond that I pay taxes on, PLUS 10%.
I'm trying to get an idea of whether or not I will owe taxes next year based on this additional taxable income. My income for 2013 will probably be around $72,000, not including the IRA distribution. I think my only credit is the child tax credit and as of 4/11 I claim single and 0. (Prior to this I claimed single and 5. I figure it's wise to pay more taxes this year). I will file as head of household in 2013.
Erin
Salem, OR

A: The general rule for IRA withdrawals before age 59 and 1/2 is that they are subject to a 10% federal excise (penalty) tax. The State of Oregon does not assess a separate state excise tax. There are certain exceptions to this general rule, including a $10,000 exception for money withdrawn in connection with the purchase of the taxpayer's first principal residence.

If you withdraw $20,000, you will have to pay federal and state income tax on the entire withdrawal, to the extent that it exceeds any "basis" you may have in the withdrawal. You may have "basis" in your IRA if you made nondeductible contributions to it. You will also have to pay the additional 10% penalty tax on the amount of the distribution that exceeds the $10,000 exception for a first time home purchase.

There is not enough information in your question to allow me to estimate what your 2013 federal and state tax liabilities would be on the your 2013 income including the withdrawal, but here's a simplified example: If you will be in the 25% tax federal tax bracket (taxable income between $47,350 and $122,300 using the 2012 head of household rate schedule) the additional federal regular tax on the $20,000 withdrawal would be $5,000. The 10% penalty tax on the $10,000 in excess of the exception would add $1,000 to that for a total of $6,000. This would be in addition to the tax on your other income. You will also have the additional state tax on the $20,000. So your net withdrawal will be substantially less than $20,000.

You can have income tax withheld from your IRA withdrawal. The default federal withholding is 20%. You can direct your IRA custodian to withhold more.

It might be worth having a tax professional prepare a projection of your 2013 federal and state tax liabilities so that you will know before you withdraw the money how much the tax obligation will be. This may influence your decision about how much to withdraw given what you will need for your home purchase.

You will also be able to have withholding paid in so that you will not have large balance payable with your tax returns. At least you will avoid an unpleasant surprise next spring when you have your 2013 taxes prepared.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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