How do I calculate recursive taxes on a large Traditional IRA withdrawal?

What you're describing is definitely a challenging tax situation, but there are ways to handle it! This is actually a common problem when taking large distributions from traditional retirement accounts. The calculation you're looking for is called a "gross-up" calculation. Instead of withdrawing what you need and then more to cover taxes (which creates that recursive nightmare), you need to determine the total withdrawal needed up front. For a simple version: If you need $270K after taxes and your tax rate is 35%, you would calculate: $270K ÷ (1 - 0.35) = $415,385. This means you'd withdraw about $415K, pay roughly $145K in taxes, and have your $270K left over. But before you do this, consider a few things: 1) Are you sure you'll be in the 35% bracket for the entire withdrawal? Tax brackets are progressive, so only the amount within each bracket gets taxed at that rate. 2) Have you considered spreading the withdrawal over multiple tax years to potentially lower the overall tax hit? 3) Have you talked with a mortgage lender about qualifying with your retirement assets instead of liquidating them?

After struggling with almost the exact same situation last year (took out $195k for a condo purchase post-divorce), I found this amazing tool at https://taxr.ai that saved me thousands. I was doing the same circular math trying to figure out how much extra to withdraw to cover the taxes on the extra withdrawal to cover the taxes... you get it. Their calculator handled all the recursive tax calculations automatically and showed me exactly how much to withdraw to end up with my target amount after taxes. It also broke down which tax brackets each portion would fall into, plus state taxes (which I totally forgot about initially). Huge relief after hours of frustrating spreadsheet work!

Just wanted to update after trying taxr.ai that Profile 7 recommended. It was exactly what I needed! The recursive tax calculator showed I needed to withdraw $307k to end up with my $200k target after federal and state taxes - way less than I was calculating manually. The most helpful feature was actually the tax planning section that showed how spreading the withdrawal across two years would drop my effective tax rate from 29% to 22%. I'm going to take half in December and half in January now, which will save me almost $21k in taxes! Definitely worth the few minutes it took to input my information.

Have you considered trying to contact the IRS directly to ask about this? I know it sounds crazy but after weeks of trying to get answers about a similar retirement withdrawal situation, I used https://claimyr.com to get through to an actual IRS agent within 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through how the withholding works on large IRA distributions and explained some exceptions that might apply in my case. Way better than trying to guess or piece together info from random websites. Sometimes you just need to talk to someone who deals with these rules every day.

I'll admit I was completely wrong about Claimyr. After trying repeatedly to get through to the IRS myself about my retirement withdrawal questions, I gave in and tried the service. Within 20 minutes I was talking to an actual IRS agent who explained exactly how the withholding should work for my situation. The agent confirmed that I could request a specific withholding percentage on the distribution (using Form W-4R) instead of the default 20%, which solves the whole recursive calculation problem. She also mentioned that I might qualify for an exception to the 10% early withdrawal penalty since I'm using the funds for a first-time home purchase (which applies if you haven't owned a home in the last 2 years). Definitely information I couldn't have found just googling around.

Something nobody's mentioned yet - have you looked into 72(t) distributions? If you're under 59.5, this might help you avoid the 10% penalty. You'd need to take substantially equal periodic payments based on your life expectancy, but it could be better than taking one huge taxable hit. Worth considering if you can spread out your home purchase timeline. Another option: if this is for a first-time home purchase (IRS defines this as not having owned a home in the last 2 years), you can withdraw up to $10k from an IRA without the 10% penalty, though you'll still owe income tax.

Has anyone mentioned withholding yet? When I did my IRA withdrawal last year, I had them withhold 35% for federal taxes right off the top. That way I didn't have to do that recursive calculation - the withholding counts as if it was paid evenly throughout the year, so no underpayment penalties. You just fill out the form saying what % you want withheld.

One thing that might help reduce your overall tax burden is checking if you qualify for any deductions or credits that could offset the increased income from your IRA withdrawal. Since you mentioned you're divorced, make sure you're not missing out on head of household filing status if you have dependents, or consider if you can bunch itemized deductions (like charitable contributions or state taxes) into the year you take the withdrawal to maximize their benefit. Also, don't forget about estimated quarterly tax payments! If you're taking this withdrawal mid-year and your withholding plus regular paycheck taxes won't cover the full liability, you'll need to make estimated payments to avoid underpayment penalties. The IRS generally wants you to pay 90% of current year taxes or 100% of last year's taxes (110% if your prior year AGI was over $150k) throughout the year. Have you run the numbers on what your effective tax rate would be if you spread this over 2-3 years instead of taking it all at once? Even if it delays your home purchase slightly, the tax savings could be substantial enough to make it worthwhile.