First year of FIRE TAX question

[bwtroutster]

I retired March 31st from a megacorp with pension and 401K at 57 using the Rule of 55. I needed additional funds to supplement my pension form 57 to 19 1/2. The 401K did not allow multiple distributions so I rolled most of the 401K funds over to an IRA and took $105K (after 20% withholding) in cash distribution. I know I will owe taxes for the first time in many years. My question is will I have to make an estimated tax payment in June or can I wait until 2015 tax time and pay what I will owe? Is there a penalty the first year of FIRE? I know I will be in the 28% tax bracket and without making 401K contributions for 9 months of 2014, my tax bracket will be much higher this year than later. Any advise would be greatly appreciated.

 

[pb4uski]

Do a projected 2014 tax return to see if your withholdings from your pay and the distribution cover what you will owe.

Also, there are certain safe harbors from penalty even if you will own when you file your tax return next year.

 

[kaneohe]

Some minor details are missing:e.g., filing status,other income.....but you might use this table (subtract out deductions, exemption) to estimate taxes. http://fairmark.com/general-taxation/reference-room/2014-tax-rate-schedules/
It feels like your withholding on your distribution might cover most of your taxes but w/o knowing the other details, it is hard to be sure. If you withhold
your safe harbor as pu4uski said, you should be ok..........withhold 90% of your this yr tax (for 2014) or 100% of last yr (2013) tax.

 

[Animorph]

I retired March 31st from a megacorp with pension and 401K at 57 using the Rule of 55. I needed additional funds to supplement my pension form 57 to 19 1/2. The 401K did not allow multiple distributions so I rolled most of the 401K funds over to an IRA and took $105K (after 20% withholding) in cash distribution.

I'm pretty sure any withdrawal from an IRA before 59.5 will incur a penalty. Only 401k's allow withdrawals if you retire after 55. So hopefully that 105k came from the 401k directly, not 401k to IRA to cash. You might want to reverse this if it was the latter case.

You most likely need to pay estimated taxes, unless you actually owed no taxes last year. And that means no taxes, not just that your withholding matched your tax liability. If your taxable events occurred before 4/1, you should have made a tax payment on 4/15. Otherwise your next payment is due 6/15. Your "safe harbor" is to pay the same amount of taxes as you did last tax year, including this years withholding and four equal quarterly estimated tax payments. If your AGI was over 150K last year, then the safe harbor is 110% of last years taxes. Barring that, you need to pay at least 90% of the tax you will owe.

Publication 17 (2013), Your Federal Income Tax

"If you did not pay enough tax, either through withholding or by making timely estimated tax payments, you will have an underpayment of estimated tax and you may have to pay a penalty.
Generally, you will not have to pay a penalty for 2013 if any of the following apply.

• The total of your withholding and estimated tax payments was at least as much as your 2012 tax (or 110% of your 2012 tax if your AGI was more than $150,000, $75,000 if your 2013 filing status is married filing separately) and you paid all required estimated tax payments on time.
  
• The tax balance due on your 2013 return is no more than 10% of your total 2013 tax, and you paid all required estimated tax payments on time.
  
• Your total 2013 tax minus your withholding and refundable credits is less than $1,000.
  
• You did not have a tax liability for 2012 and your 2012 tax year was 12 months, or
  
• You did not have any withholding taxes and your current year tax less any household employment taxes is less than $1,000.

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