Let's assume that we've already determined an early withdrawal from a Traditional IRA will be taken and that it does not qualify for any of the tax-free conditions. I am aware of the lost opportunity cost, the taxes, etc.

What I am interested in is the best way (i.e., most optimal from a cost-savings standpoint) to execute the withdrawal, assuming one also plans to pay the taxes from the withdrawn funds.

I know a withdrawal is subject to an immediate 10% early withdrawal penalty, and that the penalty is paid on the total withdrawn amount. I also know that the withdrawal is subject to income taxes at the filer's normal tax rate.

My first question is: Does the total amount, or the post-10% penalty amount, get taxed? I would assume it's the post-penalty amount since that's what's actually income, but wanted to be sure.

My next question is: How to best time withdrawal of the funds? My thinking is that you can realize some tax advantage by with drawing the amount you intend to use + the 10% penalty initially and using it as needed. Then, make a second withdrawal in the next calendar year to pay the taxes on the first withdrawal, making sure to take out enough to cover the taxes from the first one, plus the 10% penalty, plus the taxes on the new withdrawal. This way, you could better manage your tax brackets for both years and it would be easier to stay within the lowest possible tax bracket (as opposed to taking it all out at once which would be more likely to raise your tax bracket for that year). Does this scenario make sense, and is it possible/legal?

If it helps, here are some concrete numbers for my specific scenario (though I am interested in general answers to help the entire community). I am married, filing jointly. Household income is around $200k (fluctuates with end of year bonus). I am looking to withdraw net usable funds of approx. $100k - $120k from a Traditional IRA. Total withdrawal when all is said an done will need to be about $200k to account for 10% penalty + income tax. The relevant tax brackets for 2015 are: tax brackets

Again, I'm not interested in whether this is a good idea. I'm curious how to proceed on the assumption that the "good idea" question has already been addressed. Thanks!

2 Answers 2


Short answer: It doesn't matter - it's all based on percentages anyway. If there are transaction costs (sales commissions on stocks, for example), do it all at once.

The taxes owed are based on the entire amount withdrawn, including the 10% tax penalty. Your financial institution will likely offer to withhold 20% for taxes (some give you the choice, others just do it). The 20% may or may not reflect your actual income tax rate. Regardless, you will be charged the additional 10% penalty when you file your tax return next year. It will be added into the amount of tax owed. In that regard, it's kind of a "stealth cost" that comes back to bite you since you didn't see it when you got the money out of the IRA.

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    Wouldn't it still be beneficial to do it in multiple years to put more of the withdrawal in the 28% tax bracket than the 33% tax bracket?
    – Alex B
    Commented Mar 23, 2015 at 16:44
  • @AlexB, there is a marginal savings (pun intended) for spreading the withdrawals across multiple years. It is amusing that OP is worried about the marginal difference between 28% and 35% tax brackets, but does not seem to care at all about giving away a full (not marginal) 10% in penalties.
    – Kent A.
    Commented Mar 23, 2015 at 17:11

The IRA doesn't care so much about gross income as your taxable income. That's where you do the math.

Yes, 10% is on the gross withdrawal, and the gross withdrawal also gets added to taxable income.

From what your offered, we are probably looking at 28/33% for income tax plus the 10% penalty.

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