Another quarterly estimated taxes question

[audreyh1]

Quote:

Originally Posted by Cobra9777 Not sure if you were responding to my post (#34) or not... But we have no withholding on Roth conversions. All tax is paid from taxable funds. Perhaps you misunderstood something?

No, I was responding to the general discussion including pb4uski and OldShooter of under which circumstances using withholding from IRA withdrawals to pay estimated taxes is an option.

RunningBum summarized it very well.

If you aren’t drawing from an IRA yet to fund your living expenses, or to satisfy RMD requirements, withholding taxes as a one time thing at the end of the year is not an option.

You may have withholding from pensions and/or SS to cover estimated taxes, but these are generally paid evenly throughout the year as a fixed percent of each income payment.

If you are doing Roth IRA conversions you probably don’t want to use withholding because it reduces the amount you can convert, reducing the benefit of the Roth conversion. And if you are younger than 59.5 you will incur the 10% penalty on the amount withheld for taxes. Roth conversions are available at any age, but taxes withheld without penalty are only available to those older than 59 1/2.

[pb4uski]

Quote:

Originally Posted by racy Am I understanding this correctly? You're withdrawing from your IRA the amount of your taxes due on taxable accounts?

Yes.. but not just my taxable accounts... on everything. So if I do a computation of estimated taxes (mini-tax return) and I owe $10k then I would do a $10k tIRA withdrawal and have it fully withheld.

However, since the tIRA withdrawal is taxable, I have to take the $10k and divide it by (1- my 12% marginal tax rate) and do a withdrawal of $11,364 and have it fully withheld.

The tax at 12% on $11,364 is $1,364 so in effect I have withdrawn the $10k in tax on my other income and the $1,364 tax on the withdrawal.

[pb4uski]

Quote:

Originally Posted by Dtail Both you and @Audrey1 are under 70. I assume you are going this route as part of your stated strategy of using your TIRA accounts for spending before 70 in order to reduce the tax torpedo.

I'm only 63.

While it plays into that tax torpedo strategy the main purpose is because they treat witholdings as paid throughout the year. You need to be over 59 1/2 to use it though because of the 10% penalty.

[kaneohe]

Quote:

Originally Posted by audreyh1 .................................................. If you aren’t drawing from an IRA yet to fund your living expenses, or to satisfy RMD requirements, withholding taxes as a one time thing at the end of the year is not an option. .................................................. .......... If you are doing Roth IRA conversions you probably don’t want to use withholding because it reduces the amount you can convert, reducing the benefit of the Roth conversion. And if you are younger than 59.5 you will incur the 10% penalty on the amount withheld for taxes. Roth conversions are available at any age, but taxes withheld without penalty are only available to those older than 59 1/2.

Alan S. from the fairmark.com forum has suggested a possible workaround.
Make a w/d from TIRA and do the desired withholding. Then depending on what you want to do: within 60 days.......

1) Replace the funds back into TIRA. TIRA is intact and w/h is accomplished.
or
2)Have the funds less w/h transferred to Roth. Replace the missing w/h and transfer to Roth. Roth is complete and w/h is accomplished.

There should not be any early withdrawal penalty there was no net withdrawal from TIRA or Roth conversion was done for all the funds. Of course you must be sure you follow the rule of only 1 IRA rollover every 12 mos or else there will be problems.

[ERD50]

Quote:

Originally Posted by kaneohe Alan S. from the fairmark.com forum has suggested a possible workaround. Make a w/d from TIRA and do the desired withholding. Then depending on what you want to do: within 60 days....... 1) Replace the funds back into TIRA. TIRA is intact and w/h is accomplished. or 2)Have the funds less w/h transferred to Roth. Replace the missing w/h and transfer to Roth. Roth is complete and w/h is accomplished. There should not be any early withdrawal penalty there was no net withdrawal from TIRA or Roth conversion was done for all the funds. Of course you must be sure you follow the rule of only 1 IRA rollover every 12 mos or else there will be problems.

Thank you, that might come in handy for me between now and RMDs.

I would check with my brokerage ahead of time to verify the logistics of this. Esp the Roth, I'm not sure exactly how you would add to the amount converted? Though #1 would be more likely for me, I'd keep any Roth conversion separate.

-ERD50

[kaneohe]

Quote:

Originally Posted by ERD50 Thank you, that might come in handy for me between now and RMDs. I would check with my brokerage ahead of time to verify the logistics of this. Esp the Roth, I'm not sure exactly how you would add to the amount converted? Though #1 would be more likely for me, I'd keep any Roth conversion separate. -ERD50

Yes , it would be good to verify w/ them or perhaps w/ Alan S or both.
I think of the Roth conversion in 2 ways:
1) Direct conversion from TIRA to Roth (usually in-house)
2) "Indirect" rollover from TIRA to Roth(between 2 institutions)....you withdraw funds from TIRA and rollover within 60 days

The proposed possible Roth conversion is like a hybrid of the 2 techniques....part of it is conventional; the w/h and replacement is like the indirect rollover.

Perhaps it might be more straightforward to replace the w/h
back into the TIRA. Then you could do a normal Roth conversion of that part .

[audreyh1]

Quote:

Originally Posted by kaneohe Alan S. from the fairmark.com forum has suggested a possible workaround. Make a w/d from TIRA and do the desired withholding. Then depending on what you want to do: within 60 days....... 1) Replace the funds back into TIRA. TIRA is intact and w/h is accomplished. or 2)Have the funds less w/h transferred to Roth. Replace the missing w/h and transfer to Roth. Roth is complete and w/h is accomplished. There should not be any early withdrawal penalty there was no net withdrawal from TIRA or Roth conversion was done for all the funds. Of course you must be sure you follow the rule of only 1 IRA rollover every 12 mos or else there will be problems.

Wow - well, I think I’ll stick to my current method of paying quarterly estimated taxes. If I’m willing do compute annualized income (run a couple more spreadsheets), I don’t have to pay much in estimated taxes until Jan 15 of the next year anyway, as ~90% of my taxable income is received in Q4+September.

BTW if the goal is to do an IRA withdrawal late in the year, withholding for estimated, then turnaround and pay it back, you had better get it all square before the end of the year.

[kaneohe]

Quote:

Originally Posted by audreyh1 ........................ BTW if the goal is to do an IRA withdrawal late in the year, withholding for estimated, then turnaround and pay it back, you had better get it all square before the end of the year.

I guess we'd have to go to Alan S. for a credible answer but I'm not sure the yr end square is necessary, tho it would be cleaner. There is stuff like recharacterization of IRA contributions that can be done in the 2nd yr by deadline......you just have to include a narrative explaining what happened or perhaps some key words on the form.

btw.......I still do the quarterly payments like you despite my longing to do the withholding......don't understand why but it feels I'm more in control and not depending on somebody else to do things right.

[pb4uski]

I'm doing withdrawals to pare down the tax deferred balances before RMDs so I just integrate the withdrawals for federal and state taxes in my calculations.

I understand the idea of doing a withdrawal with withholding and replacing the funds but I'm trying my best to reduce tax deferred.

[jollystomper]

Quote:

Originally Posted by pb4uski Correct. So if your marginal tax rate is 22% and you want to pay $10,000 in tax you need to withdraw $12,820 because the $12,820 withdrawal will result in $2,820 in tax. $12,820 = $10,000/(1-22%)

I am going to do this for this tax year (my first full year of retirement). It seems so much simpler than dealer with the quarterly estimated payments. But I may not do it in one fell swoop, maybe a couple of times during the year. For example, now is a good time for us as our tax-deferred has hit another peak. The big unknown is the end of year mutual fund capital gains, so we will be prepared for that.

[RetireBy90]

Quote:

Originally Posted by jollystomper I am going to do this for this tax year (my first full year of retirement). It seems so much simpler than dealer with the quarterly estimated payments. But I may not do it in one fell swoop, maybe a couple of times during the year. For example, now is a good time for us as our tax-deferred has hit another peak. The big unknown is the end of year mutual fund capital gains, so we will be prepared for that.

My first full year of retirement also, and DW will get first SS check next week, and rental is paid off in couple months so income from that also, so lots of uncertainty for tax due in my house. I’ll yake a draw from my TIRA to get any taxes withheld this year.

Next year will also probably do the same as I get numbers for a full year.

[RobbieB]

I've been sending in the quarterly checks ever since I retired, just like Pops.

[audreyh1]

Quote:

Originally Posted by kaneohe I guess we'd have to go to Alan S. for a credible answer but I'm not sure the yr end square is necessary, tho it would be cleaner. There is stuff like recharacterization of IRA contributions that can be done in the 2nd yr by deadline......you just have to include a narrative explaining what happened or perhaps some key words on the form. btw.......I still do the quarterly payments like you despite my longing to do the withholding......don't understand why but it feels I'm more in control and not depending on somebody else to do things right.

For us, what it comes down to is that I don’t care to mess with our IRAs until RMD age unless we go through a low income year (market sell off, opportunities for tax loss harvesting), in which case I’ll definitely reevaluate doing a Roth conversion.

Unlike pb4uski (I assume), our tax deferred accounts are about 13% of our retirement assets, and it’s not clear that we would gain a noticeable tax advantage by converting any early.

[pb4uski]

Quote:

Originally Posted by audreyh1 For us, what it comes down to is that I don’t care to mess with our IRAs until RMD age unless we go through a low income year (market sell off, opportunities for tax loss harvesting), in which case I’ll definitely reevaluate doing a Roth conversion. Unlike pb4uski (I assume), our tax deferred accounts are about 13% of our retirement assets, and it’s not clear that we would gain a noticeable tax advantage by converting any early.

Is your marginal tax rate now lower than it will be when you are RMD age?

[audreyh1]

Quote:

Originally Posted by pb4uski Is your marginal tax rate now lower than it will be when you are RMD age?

Hmmm. Marginal tax rate - is dominated by cap gains/qualified dividend income in our case. So you could say it’s quite high as any Roth conversions just pushes our cap gains taxes higher plus the ordinary income tax. Plus we pay NIIT. I doubt we’d be able to do enough Roth conversions at a lower tax rate to avoid the torpedo anyway.

I’m focusing instead on reducing our cap gains distributions by moving to more tax efficient funds as tax considerations allow. Taking best advantage of lower cap gains rates now, which will vanish once we start drawing SS.

If we have a great market crash in the next 6 years, I’ll be able to accelerate this process dramatically, but I am very careful what I wish for!!! And of course tax loss harvesting continues to be an option past SS and RMDs, but if earlier it may help allow more in Roth conversions.

I did manage to get rid of some bad actors (funds that have been paying excessively high cap gains distributions) last year during the December market sell off. I wish I had done a little more but the recovery was very fast.

[marko]

I should, but don't pay estimateds.

I pay the penalty and the tax due the following April. Once and done with it.

[OldShooter]

Quote:

Originally Posted by jollystomper ... But I may not do it in one fell swoop, maybe a couple of times during the year. For example, now is a good time for us as our tax-deferred has hit another peak. ...

Well, you can sell without having to pay Uncle the proceeds right away. Put the money into t-bills or an MMF and pick up a few bucks between now and mid-December. Waiting until December doesn't have to be a bet on the equity market. We'll probably be making our December payment from the fixed income side of our AA.