How to pay estimated taxes on withdrawal from deferred account

[mystang52]

If I take out my annual money needs from my tax deferred account on say, January 1, can I pay quarterly estimated taxes on this without fear of penalty? Or must I pay the "full" amount that first quarter?

[Souschef]

As far as I know, it does not matter when you take the money out. I have my RMD's scheduled throughout the year for gifts and estimated taxes.
The 1099R you will receive just gives the total amount, not when it was withdrawn/ It is up to you to figure out what your quarterly estimated taxes should be..

[marko]

Your tax deferred administrator should offer you the opportunity to pay all the taxes at withdrawal time.

[LarryMelman]

IRS "Topic No. 306" says
The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. ... For more information, refer to Publication 505, Tax Withholding and Estimated Tax.


Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form 2210.pdf, Underpayment of Estimated Tax by Individuals, Estates, and Trusts to see if you owe a penalty for underpaying your estimated tax.

[LarryMelman]

But the custodian/administrator would withhold taxes from the withdrawal, right? Or would they provide an option for you to pay the taxes with other money?


edited to add: I am thinking more about Roth IRA conversions where I want the max amount to reach the Roth. If this is just a "withdrawal", then clearly it doesn't matter.

[pb4uski]

Quote:

Originally Posted by mystang52 If I take out my annual money needs from my tax deferred account on say, January 1, can I pay quarterly estimated taxes on this without fear of penalty? Or must I pay the "full" amount that first quarter?

The IRS considers any withholdings to have been paid throughout the year whether the withholding is in January or December.

What a lot of us do is to do a tax-deferred withdrawal as a withholding in December for our estimated payment for the year.

In your situation, say you are withdrawing $100k and expect to pay $7k in tax. You could take out $93k with no withholdings on January 1. In December you can withdraw $7k and have the entire amount withheld (so $7k goes to the IRS and zero go to you) and still satisfy your tax obligation.

Vanguard only allows 99% of a distribution to be withheld.

[BrianB]

Yes to what PB4 says. Here's an article that goes into more detail:

https://financialducksinarow.com/166...-tax-payments/

An excerpt:

"A little-known fact about IRA distributions is that when you have taxes withheld from the distribution (which are then sent directly to the IRS), the withheld money is considered to have been received throughout the year – even if it is received late in December. Using this fact to your advantage, you could figure out how much your total estimated tax payments should be for the year sometime in early December, and then take a distribution from your IRA in that amount. Here’s the trick: Instead of taking the distribution yourself, fill out a form W-4P (or use your custodian’s form) to direct the total amount of the withdrawal to be withheld and sent to the IRS. Voila! You’ve now made even payments to the IRS for each of the four quarters, on time with no penalties!"

We did this in 2018 for the first time and had no problems. We took a $2500 distribution in mid-December and specified 80% Federal withholding and 20% State withholding.

We received zero from that distribution. The tax payments were enough to cover our taxes due for our annual IRA distribution, micro-pension and dividends from our taxable investment account - all of which had zero withholding.

Brian

[Bamaman]

I just get Fidelity to hold the estimated taxes on both U.S. and state taxes.

[JustCurious]

Quote:

Originally Posted by pb4uski The IRS considers any withholdings to have been paid throughout the year whether the withholding is in January or December.

This is true for withholdings, but I do not think it is true for estimated tax payments. I don't know why they are treated differently, but they are.

[GrayHare]

Quote:

Originally Posted by pb4uski The IRS considers any withholdings to have been paid throughout the year whether the withholding is in January or December.

True, which means if a person takes a large retirement distrib during January, that person's estimated tax payment for it is due Apr 15, rather than spread across the year.

[LarryMelman]

Quote:

Originally Posted by GrayHare True, which means if a person takes a large retirement distrib during January, that person's estimated tax payment for it is due Apr 15, rather than spread across the year.

Unless they take another distribution toward year-end and uses it to pay all his/her expected tax bill. Because you can do that with distributions, but not with estimated tax payments.



Please confirm that I'm understanding this correctly.

[kimcdougc]

When I take a withdrawal from our IRA we just have taxes taken out at the withdrawal time. Takes all the guess work out of it.

[JustCurious]

Quote:

Originally Posted by LarryMelman Unless they take another distribution toward year-end and uses it to pay all his/her expected tax bill. Because you can do that with distributions, but not with estimated tax payments.

I think you mean to say "Unless they withhold enough sometime during the year to pay the tax bill." Withholding and estimated tax payments are treated differently.

[GrayHare]

Quote:

Originally Posted by LarryMelman Unless they take another distribution toward year-end and uses it to pay all his/her expected tax bill. Because you can do that with distributions, but not with estimated tax payments. Please confirm that I'm understanding this correctly.

The IRS will consider the year-end withheld amount to be spread evenly across the year, which could mean underwithholding for the first quarter if one had taken a large distribution during that quarter.

[pb4uski]

Quote:

Originally Posted by JustCurious This is true for withholdings, but I do not think it is true for estimated tax payments. I don't know why they are treated differently, but they are.

+1

[N02L84ER]

pb4uski, I am curious and have 2 questions.

In your example, could the taxpayer withdraw the $100k in January and make 4 equal estimated tax payments of $1750 without triggering any penalties?

In December, if it looks like they miscalculated and owe another grand, could they "withdraw" $1010 and have $1000 withheld for Fed taxes without triggering any penalties?

[kaneohe]

Quote:

Originally Posted by GrayHare The IRS will consider the year-end withheld amount to be spread evenly across the year, which could mean underwithholding for the first quarter if one had taken a large distribution during that quarter.

The IRS default is to assume that income is also received spread out evenly during the year so there should be no problem if payments are made similarly
(or assumed so , as in w/h).

[kaneohe]

Quote:

Originally Posted by N02L84ER pb4uski, I am curious and have 2 questions. In your example, could the taxpayer withdraw the $100k in January and make 4 equal estimated tax payments of $1750 without triggering any penalties? In December, if it looks like they miscalculated and owe another grand, could they "withdraw" $1010 and have $1000 withheld for Fed taxes without triggering any penalties?

yes to both..................income is assumed to be evenly received during the yr
and if payments are the same, no problem. In the first case you are actually
paying evenly during the yr; in the second, the w/h is considered (for some reason) to be the same.