Withholding in Retirement

[GalaxyBoy]

Maybe a dumb question but this is my first year in retirement.

I’m thinking of doing a partial Roth conversion by the end of the year, but the tax liability would result in an under withholding penalty if I don’t get more money to Uncle Sam in time. What’s the easiest way to do this? An estimated tax payment? I certainly don’t want to withhold any of the IRA.

I worked until March so without the conversion I’m OK. Going forward, DW can withhold from her SS, I can withhold from my inherited annuity payments, etc. plus I figure I’ll probably be doing estimated taxes. I’m interested in the short term.

Thanks in advance.

 

[braumeister]

One little trick some people use is to (if you can) withhold enough to cover everything including your Roth conversion right now.

Since the IRS considers anything withheld to to have been withheld evenly throughout the year, that can obviate the need to make estimated tax payments.

 

[pb4uski]

I think the best solution would be to use the annualized income method and do a 4Q2017 estimated tax payment.

Essentially, this approach shows the IRS that you had paid in what would be due up through August 31 and that you made estimated tax payments in 4Q commensurate with your tax liability arising in 4Q because of the Roth conversion.

When you file your tax return you'll need to include a Form 2210 where you show the calculations.... the Form 2210 can be a bit of a PITA if you have a lot of activity because you essentially have to allocate all your income and deductions across quarters during 2017... I've done that for years and have it down so it isn't an issue for me but the first time is a bit of a pain.

 

[pb4uski]

One little trick some people use is to (if you can) withhold enough to cover everything including your Roth conversion right now.

Since the IRS considers anything withheld to to have been withheld evenly throughout the year, that can obviate the need to make estimated tax payments.

This trick works great for IRA withdrawals.

The problem with this for Roth conversions is that you want to pay your Roth conversion taxes from taxable funds if you can to maximize the amount that is tax-free for the rest of your life.

 

[jimnjana]

I makes one time payment to the IRS in December for more than what I owe on my Roth conversion. I use my tax refund to buy I bonds.

 

[pb4uski]

It depends on what you are doing with the IRA money. If you are spending it then I agree it is just as easy to have estimated taxes withheld.

However, if you are doing a $100 Roth conversion and have 20% FIT withheld, at the end of the day you only have $80 in the Roth that is tax-free for the rest of time. OTOH, if you have no withholding and pay the $20 tax from taxable funds, you have $100 in the Roth that is tax-free for the rest of time.... in effect you did the former and were able to make a Roth contribution of $20 even if you have no earned income.

 

[bingybear]

I just let them keep any tax refund for the next year and in the 1st quarter I pay estimated to bring the sum up to what I paid the previous year. Since RE the taxes have been relatively low. This method takes little thought and keeps the penalty gods away. As long as taxes are low this makes sense to me. When taxes rise I may think otherwise.

 

[Gotadimple]

The question was what is the easiest way: make a payment now via EFTPS to cover your expected increase in taxes due to the conversion to avoid the underpayment penalty.

You need to set up an account which can take up to two weeks before you can authorize a payment. They send your PIN via email. You really have until about January 10 to make a fourth quarter estimated payment and have it apply to 2017 taxes.

That also, then, sets you up for next year when you can set up your payments for monthly or quarterly (on the IRS Schedule which is not truly quarterly)

Hope that helps,
Rita

 

[akck]

I’ll admit something. It took me 2 years to get withholding and quarterly payments under control after I retired. Now I withhold just enough so I either have to pay a little or get a little back. All told, the penalty wasn’t that big. I think it was under $25 each year. So don’t stress too much about it. Just make sure you make a "late" quarterly payment to cover most of the tax owed.

 

[43210]

I’ll admit something. It took me 2 years to get withholding and quarterly payments under control after I retired. Now I withhold just enough so I either have to pay a little or get a little back. All told, the penalty wasn’t that big. I think it was under $25 each year. So don’t stress too much about it. Just make sure you make a "late" quarterly payment to cover most of the tax owed.

Did tax software do most of the figuring? So although it's too late for that tax year if you underpaid, the penalty is modest (and they don't throw you in jail) and the tax software deals with the number crunching and automatically choosing optimal formula/method?

Then, when tax-planning so that it doesn't happen next time, is the strategy this?:
(1) Have enough withheld from somewhere (anywhere) if possible, otherwise
(2) Make an estimated tax payment in the quarter that an activity (e.g. Roth conversion) occurs. What's a safe amount to pay? Can you just figure using your marginal tax rate?

Is that right?

 

[gayl]

I just let them keep any tax refund for the next year and in the 1st quarter I pay estimated to bring the sum up to what I paid the previous year.

IMHO This seems to be the easiest approach although I did have to go on the IRS2GO app and stick in an extra payment when I had a large net gain in June fortunately that app is super easy to use

 

[Bamaman]

I will go to my Fidelity IRA Rollover account and withdraw say $1000. I might setup a $1 wire transfer and have some put in IRS withholdings and the balance to state income taxes.

Withdrawals is something everyone needs to look into the next couple of weeks.

 

[bingybear]

Withdrawals is something everyone needs to look into the next couple of weeks.

why?

 

[akck]

Did tax software do most of the figuring? So although it's too late for that tax year if you underpaid, the penalty is modest (and they don't throw you in jail) and the tax software deals with the number crunching and automatically choosing optimal formula/method?

Then, when tax-planning so that it doesn't happen next time, is the strategy this?:
(1) Have enough withheld from somewhere (anywhere) if possible, otherwise
(2) Make an estimated tax payment in the quarter that an activity (e.g. Roth conversion) occurs. What's a safe amount to pay? Can you just figure using your marginal tax rate?

Is that right?

I retired at the end of a year, so for planning, it was all new and I underestimated it. The second year, I thought I withheld enough from my income streams to avoid quarterly payments, but missed the mark again. By the third year, all was fine.

 

[GalaxyBoy]

Without a Roth conversion this year I've got plenty withheld. Considering how late it is in the year and since I'm new to this, I think I'll do tax gain harvesting this time around and look into Roth conversions next year. I have one active fund left that has been a good performer, but has a high ER and is outside my investment policy statement, plus I'm not convinced it will continue to perform well. The only reason I haven't sold it up to now is taxes, and this is a good chance to rebalance and not pay capital gains.

 

[sengsational]

I get the tax software in November, get estimates typed in, then dial the withholding on the December tIRA withdrawal to about meet the tax liability. For me, it's easier than fiddling around with estimated tax, quarterly payments, 2210 form, and all of that. The December withdrawal is what will fund my 2018 or if not enough due to AGI management, I'll pull Roth funds as needed until next December's withdrawal.

 

[Alan]

The question was what is the easiest way: make a payment now via EFTPS to cover your expected increase in taxes due to the conversion to avoid the underpayment penalty.

You need to set up an account which can take up to two weeks before you can authorize a payment. They send your PIN via email. You really have until about January 10 to make a fourth quarter estimated payment and have it apply to 2017 taxes.

That also, then, sets you up for next year when you can set up your payments for monthly or quarterly (on the IRS Schedule which is not truly quarterly)

Hope that helps,
Rita

+1

I set this up a long time ago and once set up it is very easy to use.

I just did a Roth conversion, estimated the taxes with last year’s version of TurboTax and then did an eftps payment for a little over the estimate. We’ve been retired for 8 years now and do quarterly payments through eftps.

 

[Clone]

I have pulled a December 401k withdrawal and put 80% towards Federal tax, 15% towards State tax, and the rest into my checking account. The wife was wondering what that was...

Our income has become unstable with the farm income plus everything else. My main goal is to withhold more than last years taxes. I think we were short $3500 on the Fed last year, and the penalty was something like $60, so no big deal. We do quarterly withholding for one state, so that is easy to bump up the end of year if we see extra income roll in. The other state and fed I just pull from tax deferred accounts and put toward taxes.

 

[rayvt]

I estimated the taxes with last year’s version of TurboTax and then did an eftps payment for a little over the estimate. We’ve been retired for 8 years now and do quarterly payments through eftps.

You don't need to do that. All you have to do to avoid the underpayment penalty is make sure your total quarterly payments + withholding equal the amount of last year's tax. I tried the estimating thing, and I could never even come close to being right, I'd always overshoot or undershoot.

If you do quarterly estimated payments, each quarter has to be right, even if the total comes out to be right. But withholdings just have to total right, it doesn't matter when it happens.

So in late December just withdraw from an IRA the amount you need so the total withholdings amount to your previous year's tax, and have the broker withhold 100% of the withdrawal.

Then in April when you file, you just pay what you need to, and you won't have an underpayment penalty.

 

[43210]

(Planning ahead here...) The withholding scenario is easy enough, in years when you have any transaction you can withhold from. You just need to withhold enough during the year (and can maybe do it at the end with a TIRA withdrawal withholding 100% the get the amount right).

But what if you have a year (or many) with no transactions you can withhold from? For example you could be spending down your taxable balance and doing Roth conversions (on which you want to pay tax from your taxable account). Then it seems estimated payments are unavoidable. So how do you get the amounts about right? Do you basically need to trace through the forms to figure it out?

 

[pb4uski]

You don't necessarily need to trace through the forms... I have an abbreviated version of my tax return in a worksheet and calculate the tax due... federal and state... to monitor where I'm at tax-wise.

I used to do a pro forma return in TurboTax but concluded that mine is simple enough to do in a worksheet. If I made any big changes then I would use the forms to verify.

YMMV

 

[rayvt]

But what if you have a year (or many) with no transactions you can withhold from? For example you could be spending down your taxable balance and doing Roth conversions (on which you want to pay tax from your taxable account). Then it seems estimated payments are unavoidable. So how do you get the amounts about right? Do you basically need to trace through the forms to figure it out?

If you have a regular IRA, estimated payments are avoidable. In late December do a withdrawal and have the broker withhold 100%.

How much to withdraw?
A: Enough so that your total withholdings plus quarterly payments equals your previous year's tax. If you do it this way, you don't need to make any quarterly payments, if you don't want to.


I think a lot of people do this, because one of my brokers has a radio button in the on-line IRA withdrawal form to withhold 100%. If you click this, it grays out all the other fields about where to send the money, the state withholding, etc.

 

[gerntz]

I get the tax software in November, get estimates typed in, then dial the withholding on the December tIRA withdrawal to about meet the tax liability. For me, it's easier than fiddling around with estimated tax, quarterly payments, 2210 form, and all of that. The December withdrawal is what will fund my 2018 or if not enough due to AGI management, I'll pull Roth funds as needed until next December's withdrawal.

This. I'm presuming the IRA withdrawal has tax withholding at part of it.

 

[43210]

(Planning ahead here...) The withholding scenario is easy enough, in years when you have any transaction you can withhold from. You just need to withhold enough during the year (and can maybe do it at the end with a TIRA withdrawal withholding 100% the get the amount right).

But what if you have a year (or many) with no transactions you can withhold from? For example you could be spending down your taxable balance and doing Roth conversions (on which you want to pay tax from your taxable account). Then it seems estimated payments are unavoidable. So how do you get the amounts about right? Do you basically need to trace through the forms to figure it out?

If you have a regular IRA, estimated payments are avoidable. In late December do a withdrawal and have the broker withhold 100%.

How much to withdraw?
A: Enough so that your total withholdings plus quarterly payments equals your previous year's tax. If you do it this way, you don't need to make any quarterly payments, if you don't want to.


I think a lot of people do this, because one of my brokers has a radio button in the on-line IRA withdrawal form to withhold 100%. If you click this, it grays out all the other fields about where to send the money, the state withholding, etc.

The crucial part is "you want to pay tax from your taxable account", rather than from your Traditional IRA/401k (e.g. withheld from a Roth conversion, or a Traditional IRA distribution). These are tax planning decision that could involve serious money. There could be arguments, depending on circumstances for deciding whether to pay taxes from Traditional space or pay taxes from taxable space, but you want to consider the choice and figure what makes financial sense.

In the context of these tax decisions, it seems to me that the issue of dealing with estimated payments is merely an issue of convenience. The minor inconvenience of figuring estimated payments is worthwhile if the tax decision/s is/are thousands of dollars better (e.g. if you are doing Roth conversions over multiple years and have a taxable account you want to spend down).