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Taxes on pension and 401k distributions
Old 02-11-2014, 10:12 AM   #1
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Taxes on pension and 401k distributions

When I retire, I will be fortunate to have a pension, plus saved assets in after tax accounts, some Roth IRA conversions I did from a previous employer Rollover IRA, and my current 401k.

In retirement, how are taxes assessed & paid for as you collect pension and begin to take 401k distributions?

Are there withholdings from pension distributions that should be based on estimated taxes? Or, do you 'settle up' for taxes at the end of the tax year?

For 401k distributions, should I plan to withdraw what I need for actual expenses plus estimated taxes, or 'settle up' the tax bill later?

And - for those that draw down for expenses in yearly increments - does that big single distribution have any tax implications? If, for example, I need $50K for the year, before taxes, does that single distribution check have a bigger tax impact for withholdings compared to spreading it out over monthly distributions?

Thanks!
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Old 02-11-2014, 10:25 AM   #2
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My pension checks have with holdings deducted, and I can adjust them if I wish using a W4 just like when I was earning a paycheck.

I've not started IRA/401k withdrawals yet, but do make IRA to ROTH conversions in lump sums and I choose to make estimated tax payments on line through eftps.

https://www.eftps.gov/eftps/

I believe that when making distributions from your 401k or IRA that you will have an option to have the brokerage with hold some taxes for you. (For my ROTH conversions I choose to pay the taxes out of my after tax accounts).
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Old 02-11-2014, 10:34 AM   #3
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I went through this recently, both for pension and required distributions from an inherited IRA. I don't know if it's the same everywhere but for me there was a spot on the forms to specify withholding. Taxes make me want to gnaw through the wall, so at least this avoids making estimated payments.
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Old 02-11-2014, 10:35 AM   #4
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You should either have taxes withheld or pay estimated taxes. You would be penalized if you 'settle up' later. Your withdrawals from 401k should be enough to pay taxes plus what you need.
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Old 02-11-2014, 10:43 AM   #5
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Thanks everyone.

Now - what about single year big lump 401k distributions for those who plan on drawing down a whole year's worth of expenses, vs smaller monthly draw down distributions?

Any difference in the tax impacts?
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Old 02-11-2014, 10:48 AM   #6
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My pension checks also have some withholding done. Because of the criminals who file false returns and steal other people's refunds, I make sure I owe something to Uncle Sam at the end of the year.
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Old 02-11-2014, 10:53 AM   #7
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On the 1040 form under "Income", there are lines for pensions, distributions, etc. It's all one lump when April rolls around but you may get penalized if you don't pay throughout the year. You don't think about it when working because your employer typically handles it, but the principle is the same.
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Old 02-11-2014, 10:55 AM   #8
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Originally Posted by BBQ-Nut View Post
Thanks everyone.

Now - what about single year big lump 401k distributions for those who plan on drawing down a whole year's worth of expenses, vs smaller monthly draw down distributions?

Any difference in the tax impacts?
There shouldn't be.
I have an RMD from a benificiary IRA. I tell the brokerage what percentage to withhold for fed and state. I do this once a year. It would be the same percentage whether you did 12 payments per year or 1 payment per year.
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Old 02-11-2014, 01:54 PM   #9
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The one difference that comes to mind is that some states may not collect income tax on pension payments.
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Old 02-11-2014, 02:05 PM   #10
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The one difference that comes to mind is that some states may not collect income tax on pension payments.
Does California?
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Old 02-11-2014, 02:31 PM   #11
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California taxes pensions, but not Social Security.
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Old 02-11-2014, 02:46 PM   #12
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Note that you can also have percentage based withholding of up to 25 % on social security also.
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Old 02-11-2014, 03:03 PM   #13
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I posted something about this a little while back. I've taken a couple of distributions from my 401K, and my fund company (TRP) says they must take out 20% for the fed, and the regular state tax percentage. I questioned this, as we are nowhere near the 20% tax bracket, but they said there is no option to withhold less. So we loan the gummint money until tax return time. And thus, my 2013 taxes have already been filed. I know my parents take regular distributions from their IRA, and they have the option not to have any taxes withheld. Since they don't make much in a year and end up paying no taxes, that's what they do.

The state portion of IRS and 401 withdrawals is 7.875% in my jurisdiction in Maryland. It is 0% in Pennsylvania. And thus, later this year, we will be moving 10 miles over the Mason Dixon line into PA.
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Old 02-11-2014, 03:22 PM   #14
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The site http://retirementliving.com has a state-by-state guide to taxes.
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Old 02-11-2014, 03:24 PM   #15
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The one difference that comes to mind is that some states may not collect income tax on pension payments.
Right. Maryland allows an exemption up to a certain amount once you turn 65. 401(k) qualifies but IRAs do not. So if you roll your 401 to an IRA you lose the exemption.
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