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Withholding and Avoiding a Penalty
Old 02-12-2018, 05:35 PM   #1
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Withholding and Avoiding a Penalty

As mentioned in other threads, I'm buying a house cash. I ended up pulling out $70K from an IRA with no withholding. My question is, "how do I make sure I'm not stuck with an under withholding penalty at tax time next year"?

I could send in a quarterly amount this quarter but I'm tapped on cash. Alternately, I believe I can have withholding done later in the year (by Vanguard) and I won't be penalized for the later time frame. Is this correct?

If so, can I just make a withdrawal from my money market account at Vanguard later this year and choose 100% withholding?
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Old 02-12-2018, 05:56 PM   #2
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That is more or less what we did this year. Our CPA told us that withholding is considered to have been spread over the year, so our entire tax obligation could theoretically have been paid this way in December with no penalty. We paid from IRAs and just had everything withheld and paid either to the feds or the state. We now have the 1099s and there is no indication of the payment date. So I guess it worked!

You might also want to investigate the "safe harbor" rule where you pay based on what your federal tax was in the previous year. I don't remember the details but that might postpone some cash flow.
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Old 02-12-2018, 06:14 PM   #3
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Originally Posted by travelover View Post
....

If so, can I just make a withdrawal from my money market account at Vanguard later this year and choose 100% withholding?
Double check that they will do Fed (& state if you need) from a Money Market. IIRC, my brokerage house only does WH from IRAs. I think maybe they said they could do it manually, but I would not want to get too close to the end of the year for that, in case there were nay glitches.

-ERD50
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Old 02-12-2018, 06:45 PM   #4
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Quote:
Originally Posted by travelover View Post
As mentioned in other threads, I'm buying a house cash. I ended up pulling out $70K from an IRA with no withholding. My question is, "how do I make sure I'm not stuck with an under withholding penalty at tax time next year"?

I could send in a quarterly amount this quarter but I'm tapped on cash. Alternately, I believe I can have withholding done later in the year (by Vanguard) and I won't be penalized for the later time frame. Is this correct?

If so, can I just make a withdrawal from my money market account at Vanguard later this year and choose 100% withholding?
IF the money market account is in your IRA, then yes... do an additional withdraral for your estimated tax and withhold 100%... need to consider state as well if applicable. IIRC, the IRS will consider this as if it was done across the year. Suggest that you call Vanguard to verify.
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Old 02-12-2018, 06:48 PM   #5
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I just roughed out my 2017 taxes. The tax bill is big, but I expected that due to a Roth conversion. I used the safe harbor rule late in the year and withdrew from my IRA with enough withholding to cover my 2016 tax payment.

Turbo tax says no penalty, even though I owe several thousand more than last year.
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Old 02-12-2018, 06:58 PM   #6
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I just roughed out my 2017 taxes. The tax bill is big, but I expected that due to a Roth conversion. I used the safe harbor rule late in the year and withdrew from my IRA with enough withholding to cover my 2016 tax payment.

Turbo tax says no penalty, even though I owe several thousand more than last year.
I did something similar. I finally sold the remainder of some legacy company stock held for over 20 years. It was time to say sayonara and put the bulk of it into diversified investments, and used some to bulk up our DAF. Big tax bill due, but since I already paid estimated taxes 110% of prior years taxes no penalty will be owed.

But I'll be doing the annualized income method this year for estimated taxes, because our income will be quite a bit less than last year so the safe harbor rule would have us way overpaying estimated taxes.
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Old 02-12-2018, 07:06 PM   #7
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For those in California having to pay estimated, CA has a strange way. I found this out the hard way, of course.
With the Feds, you pay 25% of your estimated each quarter. However, CA wants it 30%,40%,0%, and 30%.
Because I did it 25% each quarter, I was 5% in the hole first quarter, and 20 % in the hole by the second quarter.
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Old 02-12-2018, 08:26 PM   #8
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Could I withdraw from an IRA in late December, ask for 100 % withholding, then pay back the IRA within 60 days?
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Old 02-13-2018, 04:56 PM   #9
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Could I withdraw from an IRA in late December, ask for 100 % withholding, then pay back the IRA within 60 days?
Bumping this question.....anyone know the answer to this?
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Old 02-13-2018, 05:36 PM   #10
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Bumping this question.....anyone know the answer to this?
I was on the phone with my tax advisor when I saw this. He says yes, you can do it.
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Old 02-13-2018, 06:19 PM   #11
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I was on the phone with my tax advisor when I saw this. He says yes, you can do it.
Thanks, Michael. I think this is my strategy.
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