This equation computes the amount of cash you will have after you make an early withdraw from an IRA, if you withhold both the state and federal income tax and the early withdrawal penalty.

Usage

This equation reduces the amount you withdraw from an IRA by applicable taxes.  An early IRA withdrawal is subject to both income tax and a 10% penalty. To compute the state and federal tax rates, this equation allows you to estimate those rates based on your reported gross income from a recent tax return and the tax owed to your state and to the IRS from the same tax filing.

You enter the total amount you plan to withdraw and the equation returns the amount you will have in your hands after the taxes are subtracted from the total amount you withdrew.

The IRS explains this as follows:

   If you are under age 59½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies.¹

Example

Sometimes circumstances force us to pay the penalty the IRS imposes on an early withdraw.  If there is no exception applicable to your case, you will have to pay both tax on the earned income (the IRA withdraw) and an extra tax penalty of a flat 10%.  You might need

If you had an IRA account whose current balance was $28,000 and wanted to see how much money you could get if you were to withdraw the whole amount, you would first enter $28,000 as the total withdrawal (WithdrawTot). 

Next you would take your federal tax owed on a recent tax filing and the gross income reported on the same tax filing.  So, for example, if you made a gross income of $100,000 in a chosen year and your computed tax in that same year was $28,000, this would correspond to a federal tax rate of 28%..  This percentage tax rate would be the tax rate you experienced the previous year in most cases, which you can compute using the Tax Rate equation.  This percentage varies for ever individual but is basically the total tax you owed divided by your gross income.

Then enter your state tax rate.  This equation defaults to 4.63% which is the flat state tax rate in 2014 for the state of Colorado.  You should enter the tax rate for your own state as a decimal fraction.

So, if you were withdrawing a total of $28,000 from an IRA, and you input the following:

• Federal Tax Owed: $28,000
• Federal Gross Income: $100,000
• State Tax Owed:  $4,630

The total cash out to you is then:$16,063.60.

See also

• IRA Withdraw (Early) - Cash Out
• IRA Withdraw (Early) - Cash Out - with estimated Tax Rates
• IRA Withdraw (Early) - Withdraw Total
• Tax Rate
• IRS Topic 558 - Additional Tax on Early Distributions from Retirement Plans Other Than IRAs
• IRS Topic 413 - Rollovers from Retirement Plans
• Publication 560 (2014), Retirement Plans for Small Business 

1. ^ IRS Tax Topic 413