Early Withdrawal Rollover Ira

February 28th, 2011

Question: Should I have 10% withheld from an rollover IRA distribution?

I’ve rolled a significant amount of money from my 401K to a Roll-over IRA to be used as a down payment on a house. I am now ready to transfer the money from the IRA to my savings account.

I have the option to have the 10% Early Withdrawal Penalty withheld or not; with the following warning: “Regardless of your withholding election, you are responsible for the full payment of any federal income taxes, any state or local taxes and any penalties that may apply to your distribution. You may be responsible for estimated tax payments and could incur penalties if your estimated tax payments are not sufficient.”

What potential penalties do I face if I elect not to withhold and put the money in an interest earning savings account until next tax season?

Answer: In addition to all you stated, the IRS will also penalize you for not pre paying at least 90 % of your tax for that particular year, that is the reason for withholding, so they get their share before you file.

Self-Direction — How do I Know This is Legal?