401k withdrawal and tax withholding

[VolvoGirl]

Estimated Taxes is just federal and state withholding towards the actual tax on the tax return you file next April 2025.   That is a strange way for them to word it.  It should say Tax Withholding.    It's probably 20% for Federal = $500 and about 7% for State 193.75.  What state?  Are you in California?  

[cspyon]

I'm in Maryland.

Its state tax is 7.75%

[VolvoGirl]

Yep,  state withholding is 7.75% x 2500 = 193.75

[fanfare]

Jt is not sufficient to meet the 110% of prior tax or 90% of current tax rules.

IRS requires you to estimate your total tax for the year and pay as you go (i.e. estimated tax)
Assuming you have no W-2 withholding nor other withholding,
you can base your estimate on prior year's tax , or 90% of this year's tax, whichever is smaller.
each quarter your estimated tax paid and tax withheld must be at least 25% of the estimate, even if your income is uneven, this is the simplified method.
if your estimate is based on this year's tax and turns out to be wrong you may be penalized.
you can compensate by overestimating.
if your estimate is based on prior year's tax, you know that when you file by April 15, which is also the first estimated tax payment due date. How convenient.

the 25% factor means your payments are consistently spread out. this is the default calculation used by IRS to calculate penalties.

Other calculations are possible but add complexity to your tax filing.

@cspyon 

[fanfare]

I removed my earlier post - sorry for any confusion.

@cspyon 

[cspyon]

One more question:

I am not allowed to choose OPT OUT option for this tax withholdings when it comes to the employment retirement plan, right? I tried to click OPT OUT, but I am not allowed.  I called the investment company, and that's what they explained. 

WITHHOLDING TAX WITHHELD % OF TAXABLE AMOUNT OPT OUT

Minimum Federal Withholding (20% required). Understand why?	$500.00
Minimum MD State Withholding(7.75% required) Understand why?	$193.75

[dmertz]

This withholding is the mandatory minimum withholding required by federal law (26 U.S. Code § 3405(c)(1)) and state law (Md. Code Regs. 03.04.01.01(G)(2)) because these distributions are eligible for rollover.  You can request that more be withheld, but not less.

[cspyon]

So, when it comes to the employment retirement plan, this withholding is mandatory, right? I mean I can 't opt out and pay the taxes later when I file the tax returns next year??

[dmertz]

Mandatory means mandatory.  I've added references to the relevant federal statute and state code of regulations.

[dmertz]

The only way that you can avoid the mandatory tax withholding is by doing a direct rollover of the money to a traditional IRA (where the distribution is paid directly to the receiving IRA, not paid to you, and is exempt from the mandatory tax withholding because such a rollover is nontaxable), then taking distributions from the traditional IRA.  Unlike eligible rollover distributions from a 401(k), distributions from an IRA have default federal withholding of 10% but you are permitted to opt out of tax withholding and there is no default Maryland tax withholding.