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Tax withheld or paid quarterly??
Old 11-19-2013, 09:53 AM   #1
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Tax withheld or paid quarterly??

Quick question as I'm heading back to the accountant tomorrow to fill out W4-P for pension...

In looking at all income from Social Security, Pensions and drawdowns on investments, is there any advantage to drawing the full amount and paying the IRS quarterly? Or is it just more efficient and allow for less error to go ahead and withhold from each asset prior to receiving the funds?

I am leaning towards just going ahead and making sure Uncle Sam gets his rather than worry about a payment later..
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Old 11-19-2013, 11:25 AM   #2
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I withhold, but I still have to make sure to make my parents' quarterly payments, which at least software (Quicken) reminds me of. I prefer one bad April day.to the alternative.
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Old 11-19-2013, 11:29 AM   #3
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I think if in aggregate the withholding for the year will approximate or be less than your expected tax liability for the year that it is better to withhold and then use estimated tax payments to top up your total to what your expected taxes are. OTOH, if the withholding is much more than what you expect to have for a tax liability, I'm not keep on making interest-free loans to the government (not that interest amounts to much these days).
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Old 11-19-2013, 11:32 AM   #4
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I use withholding but sometimes, like this year, have to make an estimated payment using EFTPS if I have a large taxable event, such as a ROTH conversion.
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Old 11-19-2013, 11:39 AM   #5
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It probably is an individual thing depending on your inclinations. If you don't like to do this kind of thing (est. taxes) or are busy or might forget, withholding is probably better.
If you like doing this kind of thing, est. taxes provides Uncle Sam his money at the last minute so you can make your 0.7% type interest on the funds. Whichever way you do it, you still are responsible for making sure the right amount gets there at the right time..........even if you do withholding, my impression is that the tables assume the source you are withholding from is the only source of income so you can still be underwithheld so you need to make some estimates of whether you are in the ballpark even if you withhold...............because of the higher rates at higher incomes.
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Old 11-19-2013, 11:50 AM   #6
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We do installments. We pay when we are required to do so, not before.
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Old 11-19-2013, 12:27 PM   #7
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For me, it was a cash flow issue. If I had withheld sufficient taxes from my pension to cover the expected total tax bill, I then would be needing to transfer money from investments to the household checking account frequently to meet spending requirements. If minimal withholding so I don't have to do a lot of transfers, I'd then have to do quarterly installments to make up the difference. Decided easiest was to either have all tax payments either through withholding or through quarterly tax installments, but not do both (makes more work for me).

So I choose to not have anything withheld from pension or from my part-time work and just rely on the quarterly installments to cover the federal and state income tax. Almost always use the "safe harbor" approach for both state and federal quarterly payments. This also forces me to look at my tax situation several times per year to see where I stand.

BTW, there is no requirement by the IRS that you have anything withheld from pensions or SS, just that you pay as you go or incur underpayment penalties
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Old 11-19-2013, 12:49 PM   #8
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If it were still possible to get 4-5% returns on savings, I'd be a lot more inclined to wait until the last possible minute to make tax payments. With today's pathetic yields on savings it's not really even worth the effort to do that, IMO.
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Old 11-19-2013, 01:03 PM   #9
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That's what I have a tax guy to figure out...

We have taxes with held. The tax guy runs his numbers and advises a percentage.
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Old 11-19-2013, 01:48 PM   #10
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I/wife do TIRA withdrawls on a monthly basis. FIT is taken out at that time.

In late November, early December (when I get my updated version of Turbo Tax), we will adjust our final monthly withdrawl to reflect estimated FIT at that time, which will include income streams (SPIA, DW's two small DB) that FIT was bypassed during the year. Neither are currently drawing SS.

We've done this the last five years and it's resulted in a +/-$50 adjustment when we actually file our Federal taxes (no state/local tax on retirement income in our state)...
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Old 11-19-2013, 02:11 PM   #11
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I think I screwed myself this year. Last year, we hit the 25% bracket, so we ended up owing enough that we'd need to make quarterly payments in addition to what was withheld from our pay checks. I elected not to do so because I planned on having elective eye surgery in September, figuring the deduction would be enough to get us out of the 25% bracket. It turned out not all the procedures needed to be done, so the cost was about 1/3 less. I ran a quick Turbo Tax, adjusting for 2013 changes and ended up making a quarterly payment in October, to lessen any potential penalty for under withholding. I'll buy Turbo Tax in December to see if I need to make a second 4th quarter payment.

Next year, I'll be retired, which brings on more withholding issues. I'll likely withhold from my pension and make quarterly payments for retirement draw downs. I'm betting my return will be flagged because of the changes.
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Old 11-19-2013, 02:59 PM   #12
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I don't have any tax withheld from any retirement income. I use EFTPS to schedule estimated payments for Federal taxes, which is quick and easy.
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Old 11-19-2013, 03:13 PM   #13
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I have enough held from pension to cover fed income taxes. To me, this is much less troublesome than doing quarterly payments. I can very easily (online) change the amount withheld (every month if necessary) and usually try to owe a few hundred $$ at tax time.
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Old 11-19-2013, 06:04 PM   #14
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Originally Posted by Lakedog View Post
I have enough held from pension to cover fed income taxes. To me, this is much less troublesome than doing quarterly payments. I can very easily (online) change the amount withheld (every month if necessary) and usually try to owe a few hundred $$ at tax time.
That's what I do, but I take it one degree worse. I have them take out with no exemptions, then I itemize and get a nice refund. Christmas in March with my own money being sent back to me and as the federal government is willing to hold my money for free and not charge me interest to provide this service. What a deal!
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Old 11-20-2013, 10:07 AM   #15
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I don't have any tax withheld from any retirement income. I use EFTPS to schedule estimated payments for Federal taxes, which is quick and easy.
+1. Also, if I have some extra income from someplace where it isn't withheld, I'm already set up with EFTPS to make an extra payment.

The biggest reason is that when I do my Roth conversion, I think the only withholding option would be from the conversion amount. I haven't verified this but I'm not sure where else they would withhold the money from. I want the tax money to come from my taxable account so that I convert the full amount.

I also find I can fine tune my payments better and try to make it come out even. It's a bit of work, but I'm tracking everything anyway to figure out how much Roth conversion to do, and possibly in the future to get an ACA subsidy.

The other drawback is to either remember to make the payment, or to make sure I have money in my checking account if doing automated payments.
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Old 11-20-2013, 02:50 PM   #16
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You have more leeway with withholding than with estimated tax payments. Withholding is assumed to occur evenly through out the year, with only the yearly total needing to match your tax liability. You could therefore increase your withholding at the end of the year and not worry about timing issues. Estimated taxes paid in equal quarterly amounts are also treated the same way. However, there is no way to make a larger 4th quarter payment to make up for a 3rd quarter tax liability, like you could by increasing withholding. If you make unequal estimated tax payments, then you may need to figure your taxes by quarter, not a fun thing, in order to show that the tax you paid through each quarter matches the tax liability through each quarter. It may be much easier to use withholding instead.
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Old 11-20-2013, 03:51 PM   #17
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You have more leeway with withholding than with estimated tax payments. Withholding is assumed to occur evenly through out the year, with only the yearly total needing to match your tax liability. You could therefore increase your withholding at the end of the year and not worry about timing issues. Estimated taxes paid in equal quarterly amounts are also treated the same way. However, there is no way to make a larger 4th quarter payment to make up for a 3rd quarter tax liability, like you could by increasing withholding. If you make unequal estimated tax payments, then you may need to figure your taxes by quarter, not a fun thing, in order to show that the tax you paid through each quarter matches the tax liability through each quarter. It may be much easier to use withholding instead.
Agree with this. We have Vanguard withhold when making IRA withdrawals and always plan a 4th quarter withdrawal that we can use to "true up" withheld taxes to anticipated total tax if necessary.
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Old 11-21-2013, 04:09 PM   #18
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You have more leeway with withholding than with estimated tax payments. Withholding is assumed to occur evenly through out the year, with only the yearly total needing to match your tax liability. You could therefore increase your withholding at the end of the year and not worry about timing issues. Estimated taxes paid in equal quarterly amounts are also treated the same way. However, there is no way to make a larger 4th quarter payment to make up for a 3rd quarter tax liability, like you could by increasing withholding. If you make unequal estimated tax payments, then you may need to figure your taxes by quarter, not a fun thing, in order to show that the tax you paid through each quarter matches the tax liability through each quarter. It may be much easier to use withholding instead.
There are some who take the withholding thing to an extreme, withholding everything in Dec. I've never had the guts to do that but believed up to now that it was ok since that's all that I've read........until today.......see 11/21 post by Kaye Thomas, founder of the fairmark.com site. If I understand it correctly, the withholding anytime = withholding evenly throughout yr. applies strictly only to wages and not other forms of income.
Fairmark Forum :: Other Tax Questions :: Estimated Tax Payments
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Old 11-21-2013, 07:45 PM   #19
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You have more leeway with withholding than with estimated tax payments. Withholding is assumed to occur evenly through out the year, with only the yearly total needing to match your tax liability. You could therefore increase your withholding at the end of the year and not worry about timing issues. Estimated taxes paid in equal quarterly amounts are also treated the same way. However, there is no way to make a larger 4th quarter payment to make up for a 3rd quarter tax liability, like you could by increasing withholding. If you make unequal estimated tax payments, then you may need to figure your taxes by quarter, not a fun thing, in order to show that the tax you paid through each quarter matches the tax liability through each quarter. It may be much easier to use withholding instead.
OK, I get that doing it by withholding gives you more flexibility with when you take out taxes. The issue I might have with that is you must withhold by %, right? So if I saw that I would be $2000 short on my tax payments, I'd have to find out how much those last dividends and cap gains distributions will be on my mutual funds, and figure out what % I need to increase my withholdings. Not impossible, but it seems like more work and more prone to error.
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Old 11-21-2013, 10:18 PM   #20
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OK, I get that doing it by withholding gives you more flexibility with when you take out taxes. The issue I might have with that is you must withhold by %, right? So if I saw that I would be $2000 short on my tax payments, I'd have to find out how much those last dividends and cap gains distributions will be on my mutual funds, and figure out what % I need to increase my withholdings. Not impossible, but it seems like more work and more prone to error.
Probably easier than the W-4 form gymnastics I used to go through to make mid-year corrections. What a form! The percentage of withdrawal wouldn't be the end of the world. And quarterly estimated tax payments give you no flexibility after April 15. The same $2k short is easy to pay with the 4th estimated tax payment, but that also opts you in for doing your taxes by quarter or paying a penalty. I really hate figuring my taxes by quarter. It's usually good for an extra day of tax work.
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