So I had to pull funds from my IRA account earlier this year. I had taxes withheld and realize there is a penalty, however, my question is two part: with penalties and taxes for early withdrawal, I am looking at approximately 35% on gross proceeds, correct? (say this is $1k withdrawal) Broken down - a $100 penalty (10%) and $250 income tax (25% bracket). Am I correct? If I am ok paying that, it is my decision, right?
Secondly, if this $1,000 was in a regular broker account and made $1,000, I would be taxed a short term capital gain of $250 (or 25% * $1k gain) netting $750 profit. If distributions frequently or for more $$$ say $10k withdrawals (part of a ~$50k capital gain), the IRS would ask for an estimated quarterly tax plan of ~$7k or ~$8k, however, in the IRA, they could not because the gains are tax deferred and therefore they cannot project/reach in/ask for such a plan. Am I correct? Pulling the funds out of the IRA vs. a cash account seems fairly harmless then.
I can't believe it is that simple, but it appears I have found a bypass to QET. My 10% 'penalty' is actually paying the government to preserve my cashflow another ~$28-35k. What am I missing?
Update: I did some research and a subsequent spreadsheet. Assuming short term gains only in the IRA, comparing a payroll tax to the penalty and cap gains 'tax' from early distribution, there is a benefit around $80k of income (withdrawal) [better than a payroll tax in net income terms]. The added benefit is in cases of excessive gains, if withdrawals are kept even ~$5k, remaining gains are not taxed in the account and grow deferred. This is especially important in calculating 'cashflow' and tradeable funds (rather than the government 'claiming' said funds as taxable in the year earned. But managing cashflow is key as 'tax' funds remain in account and need to be ear marked.