Have you ever had to choose between a net and gross distribution? Maybe you are taking a withdrawal and you wanted to get a specific amount of money.
When you withdraw your balance from a retirement account, a portion of the money is required to be sent to the IRS for taxes on your distribution. This is called tax withholding.
If you are requesting a distribution from your account, you may want to consider how tax withholding will impact the payment you receive.
A net or gross distribution refers to the way that taxes are applied to a payment.
- Net is the amount of cash remaining after all taxes have been applied.
- Gross is the amount of cash before any taxes have been applied.
The default federal income tax withholding rate depends on the type of withdrawal:
- 20% for any distribution that can be rolled to another plan
- Examples: In-service, Retirement & Separation from service (termination) distributions
- 10% for any distribution that cannot be rolled to another plan
- Examples: Hardships, Required Minimum Distributions, and Corrective distributions
Retirement plan distributions allow for more than the default tax rate to be withheld and in some cases, the distribution may have an option to not withhold any taxes.
If you planning to withdraw money from your retirement account, you can quickly calculate the amount you will receive after taxes have been withheld by following this formula:
Withdrawal Amount x (1 – Tax Withholding Rate) = Check Amount
For Example: A $1,000 withdrawal with 20% taxes withheld would result in a $800 check.
The remaining $200 would be withheld and sent to the IRS for your taxes.
$1,000 x (1 – .20) = $800.00
If you would like to calculate how much to request from your retirement account and receive a specific amount of money to you after the taxes are withheld, follow this formula:
Check Amount / (1 – Tax Withholding Rate) = Withdrawal Amount
For Example: To receive $1,000 after 20% taxes are withheld, $1,250 must be withdrawn from your account.
The remaining $250 would be withheld and sent to the IRS for your taxes.
$1,000 / (1 – .20) = $1,250.00
The table below lists common withdrawal amounts and the amount that would be paid with 10%, 20% and 30% tax withholding rates. You can use this table to determine how much to request for your next retirement plan distribution.
Check Amount With 10%, 20% and 30% Tax Withholding
| Withdrawal Amount | 10% | 20% | 30% |
|---|---|---|---|
|
$1,000.00 |
$900.00 |
$800.00 |
$700.00 |
|
$1,111.11 |
$1,000.00 |
$888.89 |
$777.78 |
|
$1,250.00 |
$1,125.00 |
$1,000.00 |
$875.00 |
|
$1,428.57 |
$1,285.71 |
$1,142.86 |
$1,000.00 |
|
$5,000.00 |
$4,500.00 |
$4,000.00 |
$3,500.00 |
|
$5,555.56 |
$5,000.00 |
$4,444.44 |
$3,888.89 |
|
$6,250.00 |
$5,625.00 |
$5,000.00 |
$4,375.00 |
|
$7,142.85 |
$6,428.57 |
$5,714.28 |
$5,000.00 |
|
$10,000.00 |
$9,000.00 |
$8,000.00 |
$7,000.00 |
|
$11,111.11 |
$10,000.00 |
$8,888.89 |
$7,777.78 |
|
$12,500.00 |
$11,250.00 |
$10,000.00 |
$8,750.00 |
|
$14,285.71 |
$12,857.14 |
$11,428.57 |
$10,000.00 |
More about tax withholding: The amount withheld in taxes are reported to you in a Form 1099-R in January of the following year for you to include in your annual tax return. If your taxes are overpaid, the IRS will issue you a refund.
