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Why didn’t I get the full amount of my IRA withdrawal?

When you make a withdrawal from your IRA, also called taking a distribution, the amount you actually receive may differ due to a tax deduction. You’ll see these deductions noted as you’re making the withdrawal.

For example, a withdrawal of $1,000 could be reduced to $850 because of 10% federal tax and 5% state tax.

This means that the amount you receive from your withdrawal is impacted by:

  1. Federal income tax (based on your specific tax rate)
  2. State income tax

Note that any applicable penalties for early withdrawal (if you are younger than 59 ½) apply at the time you file your taxes. This means that Wealthfront does not automatically deduct this penalty from your withdrawal.

So, how does Wealthfront handle my tax withholding?

We withhold the standard applicable federal tax required by the IRS and income tax required by your state of residence. You can choose to turn withholding on or off in your account settings on Wealthfront.com:

  • Log into wealthfront.com.
  • Select your name in the upper right corner.
  • Select Settings and then IRA on the menu to the left. 

Once there, you can choose to opt out of Federal and/or state withholding. 

Things to keep in mind:

  • Some states require income tax withholding, and for those states you can’t change the withholding settings.
  • Turning off withholding for federal, state, or both could mean that you’ll owe taxes to the IRS and/or state later.
  • Investors are encouraged to consult a tax advisor for their specific situation.

What about the penalty?

A withdrawal before the age of 59 ½ is considered an early withdrawal, so a penalty of 10% may apply. This penalty is in addition to your specific federal tax rate withholding as required by the IRS and any income tax your state of residence may require.

And remember, Wealthfront does not withhold this penalty, so you’ll need to account for it when you file your taxes.

There are some exceptions where the penalty may not apply, such as:

  • You’re purchasing your first home.
  • You’re paying qualified education expenses.
  • The IRA account holder has died and their estate or beneficiaries are taking the distribution.
  • You have become disabled.
  • You have qualified unreimbursed medical expenses.
  • You’re using the funds to pay health insurance premiums while you are unemployed.

Also, if you have children by birth or adoption the SECURE ACT allows you to withdraw up to $5,000 from either an IRA or a 401(k) with no penalty.

My withdrawal was returned, so what happens to the taxes?

In most cases, we’ll credit the taxes back to your account. For more information about your withdrawal return, contact us.

How do I turn off tax withholding?

  • Log into wealthfront.com
  • Select your name in the upper right corner.
  • Select Settings and then IRA on the menu to the left. 

Once there, you can choose to opt out of Federal and/or state withholding. 

Can I customize the amount of taxes withheld from this withdrawal?

Not at this time. 

How does Wealthfront determine my minimum State tax?

We use the residential address on file at the time of your withdrawal to determine which state’s minimum withholding to apply.  Note that some states don’t require minimum withholding. 

Can I update my residential address?

Yes. To view and update your address:

  1. Log into our wealthfront.com.
  2. Select your name in the upper right corner.
  3. Select Settings and then Profile on the menu to the left. 

Once there, you’ll find the option to update your address. 

Can I withhold taxes from my Roth Conversion?

Yes. To have Federal and State minimum taxes withheld from your Roth Conversion, please reach out to support@wealthfront.com

Note that turning off withholding for federal, state, or both could mean that you’ll owe taxes to the IRS and/or state later. Please consult your personal tax adviser.

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