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optimal from a cost-savings standpoint) to execute the withdrawal, assuming one also plans to pay the taxes from the withdrawn funds.
I know a withdrawal is subject to an immediate 10% early withdrawal penalty, and that the penalty is paid on the total withdrawn amount.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:
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!