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April 10, 2016

Calculating Your ‘Gross Up’ Distribution: How Much Do You Need?

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Tip by Denise Appleby

When you receive your distribution from your IRA or 401(k)[1], it might be subject to income tax. Here’s how you calculate how much you’ll need to request as a gross distribution for your desired net (after-taxes are withheld) distribution.

Let’s say you want to receive $8,000 as your distribution, and you know that 20% will be withheld for federal income tax[2].How much should you request (gross distribution), in order to get the $8,000 (net amount) in hand?

Your formula would be as follows:

Net distribution / (100% – federal tax withholding percentage) = Gross distribution amount

$8,000 / (100% – withholding percentage) = Gross distribution amount

$8,000 / (100% – 20%) = Gross distribution amount

$8,000 / 80% = Gross distribution amount

$8,000 / 80% = $10,000

Your distribution request should be for $10,000 in order to pay the withholding tax of 20% and have an amount of $8,000 sent to you.

Let’s calculate: $10,000 x 20% = $2,000

$10,000 less withholding tax of $2,000 = $8,000

If your plan administrator withholds state taxes as well, that should be included in the calculation.

Let’s assume that your state tax rate is 5%. Your formula would be:

Net distribution / (100 % – federal and state tax withholding percentage) = Gross distribution amount

$8,000 / (100% – [20% + 5%]) = Gross distribution amount

$8,000 / (100% – 25%) = Gross distribution amount

$8,000 / 75% = Gross distribution amount

$8,000 / 75% = $10,666.66

Your distribution request should be for $10,666.66 in order to pay the combined federal and state withholding tax of 25% and have an amount of $8,000 sent to you.

Let’s calculate: $10,666.66 x 25% = $2,666.66

$10,666.66 less withholding tax of $2,666.66= $8,000

Important: Consult with your tax and financial professional before making a distribution from your retirement account. Distributions might be subject to income tax and the 10% early distribution penalty. Your financial and/or tax professional should help you determine whether taking a distribution from your retirement account is the most suitable option for you.



[1] Or other retirement account

[2] This is a mandatory minimum for distributions from qualified plans such as 401(k) and pension plans, 403(b) plans and governmental 457(b) plans, if the amount is eligible to be rolled over but is paid to you, unless an exception applies. For IRAs, you can elect not to have income taxes withheld; but if you do elect to have income taxes withheld, the minimum amount that you can elect to have withed to federal income tax is 10% of the distribution amount.

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Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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