Fire and taxes: do you withhold or estimate quarterly pay?

[BBQ-Nut]

Hope everyone is having a good week...

More pondering and calculating at my end about FIRE.

And taxes weigh heavy on my mind.

My question is, how do you handle taxes?

Have you set up your pension, annuity, 401k/IRA payouts for withholdings?

Or do you do your own calculations and go for estimated quarterly tax payments?

And, what about those that elect to withdraw a year or more's worth of expenses at a time - do you pay a single estimated tax payment at the time of withdrawal?

Some sources I've been reading on-line indicate that Uncle Sam likes to get his share close to the same time you get your money - and if you under pay, or wait to settle up at tax time, you get hit with a penalty.

Thanks for sharing!

 

[kaneohe]

For simplicity, I pay the equal quarterly estimated taxes. If you meet one of the safe harbors ( pay 100 or 110% of previous yr. taxes, or 90% of current yr ),you should be ok. If you have lumpy distributions , you can also tailor your estimated taxes to match , but you have to go through a much more complex process to prove you did it right.

If you withhold instead, it is ok to pay late in the year since withholding is treated better than estimated payments. Withholding is treated as if paid in equal quarterly payments even if paid late in December. If I could specify
a specific % withholding I might do that, but the ones I have on autodistribution
insist on using filing status/exemption to do their own calculation. I guess I could do that calculation too but since there are a number of sources, I'm too lazy to do multiple calcuations. Based on what I've seen at least one large well-known company do, I'd been afraid of taking things in December since there might not be time to fix their mistake.

I feel like I have more control w/ the estimated taxes since I only have to depend on myself. Of course someday that may be dangerous.

 

[grasshopper]

Since most of my AGI is LTCG and Roth conversions, I do quarterlies.

 

[marko]

I pay my IRA withholding at withdrawal time but I can elect what percentage to withhold. Pay it now and be done with it...if I overpay a bit and get it back in April, so be it. Better than getting whacked by under estimating, especially if your withdrawals are inconsistent.

 

[Independent]

For simplicity, I pay the equal quarterly estimated taxes. If you meet one of the safe harbors ( pay 100 or 110% of previous yr. taxes, or 90% of current yr ),you should be ok. If you have lumpy distributions , you can also tailor your estimated taxes to match , but you have to go through a much more complex process to prove you did it right.

If you withhold instead, it is ok to pay late in the year since withholding is treated better than estimated payments. Withholding is treated as if paid in equal quarterly payments even if paid late in December. .

I'm no tax expert, but I rely on the bold.

My pension has typical withholding. I also do "lumpy" distributions from IRAs. I do a rough, estimated tax when I'm getting toward the end of the years, and specify a withholding percent on the last IRA distribution that seems to get me in the ballpark.

I'll consider the 110% safe harbor if it seems relevant in that year.

 

[CaliforniaMan]

I have always done quarterlies since I was self employed and plan to do the same now that I am retired. My income sometimes varied a lot and occasionally had to pay a penalty. On the times I was late in paying and had to pay the penalty it wasn't a lot. I believe it was something like borrowing the money from the government. I think now the penalty is about 2% of the underpayment. Better to avoid it, but if you make a mistake it is not horrendous. This is just my observation, I am NOT a tax expert by any means. I don't even do my taxes myself, have my CPA do them, so take this for what it is worth. Hopefully those with more knowledge than me will comment on this.

 

[samclem]

I'm still w*rking (a bit), but when I retire I'll do quarterly payments that equal 100% of the previous year's tax liability. That way I'm assured I'l never be hit with a penalty (but I might have to pay the small interest amount on any underwithholding) and I don't have to guess what I might earn in the next 12 months.

The EFTPS makes it very easy to do the quarterly payments: Just set up the payments once per year and they come out of your account on the proper day. The only "hitch" is remembering that it's going to happen, and that the money will be leaving the account. It's probably best to set up a special bank account for periodic, predictable payments of this kind so the money is in there when needed.

 

[Sue J]

DHs pension payment has the option to withhold, so we do that because it's predictable and simple. Their website makes it very easy to change it if you need to.

I helped my self employed son set up his quarterly estimated payments at EFTPS, that was also easy and can be modified if needed.

 

[martyb]

I'll be having taxes witheld from my pension, when I start receiving it in a couple of months. Have to decide what to do about taxes on the TSP withdrawals, but not planning to start those anytime real soon.

 

[W2R]

I pay estimated taxes and it's pretty easy to do.

 

[martyb]

W2R, do you do that with your FERS pension too, or just the withdrawals?

 

[walkinwood]

Quarterly estimated payments.

 

[W2R]

W2R, do you do that with your FERS pension too, or just the withdrawals?

I do that with my FERS pension, and with my monthly TSP payments too. For some reason neither FERS nor the TSP withholds any taxes in my case, and that is the way I like it. All they deduct from my FERS pension is my FEHB, and the TSP withholds nothing.

I am glad because this simplifies figuring my estimated taxes (slightly). I just include these income sources when figuring my estimated taxes.

 

[Gotadimple]

I do both. But then I have several 'income' streams - pensions, taxable, tax-deferred, and tax-free. You also asked about what those who withdraw annually do.

I have taxes withheld from my pension, and ultimately, I expect the Feds will want to withhold from Social Security. I don't believe it is good to pay for taxes from tax-deferred accounts (401K, T-IRA, etc.), so I pay for those from my taxable accounts -- keeping the tax-deferred working as long as possible.

In this last case, I make quarterly payments to beef up the withhold from the pension (and because it makes the quarterly payment less "painful")

-- Rita

 

[arky]

Another EFTPS fan here. Very easy and convenient.

 

[scrabbler1]

I have no means to have withholding. I make estimated tax payments, but only in the last 1 or 2 quarters. I don't owe much in federal income taxes (only around $2,000) so I pay enough to make sure I owe far less than the maximum I am allowed to owe the following April.

Two things which skew my income toward the latter half of the year for estimated tax purposes:

(1) The actual "quarterly" time periods are not actually 3 months each. Instead of the expected 3-3-3-3 months they are 3-2-3-4 so the last 7 of the 12 months in a calendar year are part of the last 2 payments.

(2) I often receive large cap gain and dividend distributions in June and December, so the big June distribution is part of the second half of the year.

Put these two things together and for 2013 I had only 17% of my federal taxable icome in the first 5 months, or 2 estimated tax "quarters." The ratios are about the same for state income taxes, but I just make a big payment in either December or, if I plan to "bunch" my itemized deductions, in ealry January.

I figure I am flying under their radar and have never been questioned by the Feds or by my state in the 5 years so I'll just keep doing what I do.

 

[jebmke]

I pay estimated. Use EFTPS for Fed and State equivalent for my MD taxes. Simple enough.

 

[HFWR]

Not in that position yet, but I plan to choose withholding, because I like having things on autopilot.

 

[Animorph]

Another EFTPS fan here. Very easy and convenient.

+1

 

[pb4uski]

I usually have no tax obligation until the last quarter of the year when I rebalance bring my cash allocation back to target (which usually results in some capital gains) and do my Roth conversion to the top of the 15% tax bracket.

I usually do an estimated return in late December and make estimated payments in the last week of the year based on those estimated returns. Since I use the annualized method I'm no subject to penalties or interest.

The downside is that I have to do the analysis of taxable income by quarter for the year for Form 2106 and do a similar annual dance my state department of taxes where they send me a letter saying I owe interest and penalties and I appeal and explain that under the annualized method I don't owe them anything. I'm tempted to do quarterly payments even though I don't really need to to avoid that hassle.

 

[Kabekew]

I don't send in estimated payments and just pay the penalty and interest. It's small. These past five years I've made more keeping the money in the market than what I pay in penalty, interest and additional capital gains tax.

 

[JakeBrake]

Most of my income is IRA withdrawals, I have a set percentage withheld at each withdrawal. With both Fidelity and Vanguard you have to answer that question with every withdrawal.

Both DW and I are drawing SS. We have a set percentage withheld from each direct deposit.

 

[Bestwifeever]

All our income (pension and withdrawals from IRA) is taxed as ordinary income. We have taxes withheld and get a refund.

 

[MichaelB]

We pay quarterly estimates, but our income is all portfolio based.

 

[DTCS]

I pay quarterly estimated taxes. I use the Turbo Tax Taxcaster app to determine how much to pay in Fed taxes. In CA I use their on-line calculator. I hate paying penalties.