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When we cash out the IRA, will they take out taxes?

It is not required. But you can request it.

Is there a chance that we could owe more taxes than what they withhold?

It is almost certain that the taxes withheld will not exactly equal your tax liability for the IRA withdrawal. It might be too much. It might be too little. It may be close, or it may be way off.

All of us agree that while we want to give a benefit to our other cousins, we don't want to be holding the bill when tax time comes around.

Then there's the difficulty of deciding exactly what IS your tax liability for the IRA withdrawal. The tax code taxes your total income, not the bits and pieces. Any one item can have a ripple effect throughout your whole tax return.

Perhaps the two of the more reasonable methods are: determine your marginal tax bracket (including your state taxes) and apply that tax bracket to the income and come up with a tax amount. Or redo your return without the added income from the IRA withdrawal (and whatever other implications it had around your tax return). Compare the total tax bill with and without that income to determine your tax on that income.

In any case, you are left with an estimate of your tax bill for that income. Not an exact calculation (since that is not possible), but an estimate based on reasonable assumptions.

And if each of you shared the IRA distribution with your two cousins on an after-tax basis, that would be about as fair an arrangement as one could come up with.

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