Federal withholding from IRA distributions is optional. Some states have mandatory withholding.
Your federal withholding should be enough so that at the end of the year the total tax that has been withheld from all payments, including your salary, pension, Social security, etc totals at least the lesser of:
1) 90% of the tax due for the year.
2) 100% of the tax due for the previous year (110% if the previous year's AGI was more than $150,000 or if you were married filing separately and your AGI was more than $75,000).
You can choose whichever is less.
Note that option 1) requires being able to predict your tax for the year, whereas option 2 always works.
So for example, if you are taking a lump sum distribution in 2009 and you think your total federal tax for 2009 will be $10,000 but your total tax for 2008
was $1,000, as long as the total taxes you have withheld from all sources is $1000, you will be safe from any penalty for underpayment.
Note that the above is how much you should withhold in order to avoid a penalty for underpayment of taxes. It is not the actual amount that you owe. The actual amount that you owe is calculated at the end of the year when you fill out your Form 1040. If you just have the minimum withheld, there is a good chance you will owe more tax at the end of the year. I cannot tell you how much tax you will owe at the end of the year, but you may be able to estimate it using this calculator:
Most states follow the same rules as the federal government for minimum tax payments, but you will have to check your state's specific tax rules.
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