How Do You Calculate State and Federal Taxes on a Traditional IRA Lump Sum Distribution?


Quick Answer

Taxes on an IRA lump sum distribution are withheld by federal, state and local governments at a rate depending on the account holder's age and income bracket at distribution, as Wells Fargo reports. Federal taxes are typically withheld at 20 percent with additional penalties, state and local taxes.

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Full Answer

Account holders under the age of 65 1/2 are assessed an additional 10 percent fee by the federal government for early withdrawal of IRA funds, as Wells Fargo claims. A lump sum distribution may increase the account holder's tax bracket for the year by substantially increasing household income. Added together, federal, state and local taxes may take a sizable portion of the total distribution. Federal taxes are withheld by the employer, and other taxes are usually paid separately with state and local returns. Taxes may be calculated by determining the appropriate tax brackets that apply to the household income and total IRA distribution taken that year.

IRA distribution funds are taxed by state and local governments in the same manner as other household income, as Wells Fargo states. To estimate state and local taxes, account holders should include the IRA distribution along with other forms of income and apply any applicable tax rates to that total.

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