Pension: pay my own taxes or have plan withhold?

[Austin704]

I’m eligible for a pension when I retire and it appears I have a choice to have the pension plan withhold taxes or to pay taxes myself. I understand IRS rules require quarterly payments of estimated taxes owed and that I could incur a penalty for underpaying taxes during the year.

Still, it seems beneficial to receive 100% of my pension income untaxed and to make quarterly payments of estimated taxes rather than having taxes withheld because I then have access to more of my money sooner rather than having Uncle Sam hold it all year with no interest.

Is taking responsibility for paying my own taxes worth the risk and hassle?

Thanks!

 

[REWahoo]

Still, it seems beneficial to receive 100% of my pension income untaxed and to make quarterly payments of estimated taxes rather than having taxes withheld because I then have access to more of my money sooner rather than having Uncle Sam hold it all year with no interest.

Figure out how much you will owe the IRS and adjust your withholding accordingly. No free loan, no hassle.

 

[MichaelB]

Figure out how much you will owe the IRS and adjust your withholding accordingly. No free loan, no hassle.

+1

 

[RunningBum]

If you really want to optimize, do all of your withholding late in the year. The IRS treats withholding as if it were spread across the year, unlike those estimated payments, so you won't have an underpayment penalty like you would if you only made a 4Q estimated payment.

Personally I'd probably avoid the hassle and try to get the withholding right considering all of my tax liabilities, and spread it out over the year. But if it seemed easy enough to change, I might do it late in the year.

My concern would be how fast changes took place. If I did no withholding early in the year, and do 50% for the last 5 checks, could I reliably start the withholding with the 5th to last check? Or might I miss one, and wind up short on withholding, or catch it early and pay too much? Maybe I'd play with small adjustments the first year to see how that works before going all in.

 

[steelyman]

Personally I'd probably avoid the hassle and try to get the withholding right considering all of my tax liabilities, and spread it out over the year. But if it seemed easy enough to change, I might do it late in the year.

This works for me and is easiest. My payments are deposited monthly and are scheduled as recurring payments in Quicken. The withholding amount is normally constant throughout the year so I don’t think about it.

Unfortunately, I can’t get them to withhold at the state level so I “fake it” by “withholding” monthly into a Quicken savings goal from which I withdraw funds quarterly for estimated state taxes.

 

[CaptTom]

I'm going to be the contrarian here. I don't like having to pay taxes in April, and I don't like filling out tax forms any more often than I have to. It's well worth the few dollars interest I could be earning to let my dear old Uncle Sam have an interest-free loan, rather than go through the hassle of quarterly filings.

I do make sure the withholding isn't excessive, but always err on the side of a modest refund. It works for me, since I have more expenditures in the February timeframe (when my refund comes through.) Basically I'm spreading those extra expenditures over the whole year.

 

[Austin704]

I appreciate the quick responses. Sounds like I’m better off just getting the allowances dialed in and not trying to get creative paying taxes myself. I think I have a pretty accurate estimate of what my income taxes will be—perhaps I’ll slightly undershoot the withholding target even if that means paying a little at tax time vs. a refund.

 

[kaneohe]

It all depends on how reliable you are. If you have good ticklers to remind you, then there should be no risk and I find it (at least mentally) a lot more flexible for making changes rather than relying on someone else. If you send by mail, there is a risk there.....getting lost or being late......but there are ways to pay IRS w/o using the mail. If you get unpredictable investment income esp. in Q4, it is easier to make an adjustment by changing the size of the check instead of relying on a 3rd party.

 

[eytonxav]

I'm going to be the contrarian here. I don't like having to pay taxes in April, and I don't like filling out tax forms any more often than I have to. It's well worth the few dollars interest I could be earning to let my dear old Uncle Sam have an interest-free loan, rather than go through the hassle of quarterly filings.

I do make sure the withholding isn't excessive, but always err on the side of a modest refund. It works for me, since I have more expenditures in the February timeframe (when my refund comes through.) Basically I'm spreading those extra expenditures over the whole year.

+1 hate filing returns.

 

[joylesshusband]

Is taking responsibility for paying my own taxes worth the risk?...

There is no risk.

...and hassle?

There is no hassle.

Handle the income taxes by yourself.

 

[pacergal]

We chose to have taxes with-held, one less hassle for me at the time.

 

[Teacher Terry]

We have the taxes withheld.

 

[EarlyBirdly]

Well, we all ( most of us ) worked for X amount of years and had taxes witheld via our selections on a W4 right ?


I view this as no different.


Oh, and I'm too lazy to do it myself.

 

[donheff]

I take all of our taxes out of my Federal pension including my annuity, DW's SS, dividends and LTGs, DW's self employment tax, and my RMDs. It is a lot less hassle than paying quarterly. When DW starts RMDs in 9 years we will see if tax can be withheld by the 401K source.

 

[Cobra9777]

We both have pensions and elected to have no withholding. We have to make quarterly estimated payments anyway due to rental income, investment activity, and Roth conversions in December. So it's no incremental effort. Plus I like to pay the IRS the least amount required, at the last possible moment. We always owe an amount in April, which just barely avoids a penalty for under-withholding. And I frequently use the annualized income method due to large Roth conversions in the fourth quarter.

...I don't like having to pay taxes in April, and I don't like filling out tax forms any more often than I have to. It's well worth the few dollars interest I could be earning to let my dear old Uncle Sam have an interest-free loan, rather than go through the hassle of quarterly filings...

There are no forms or quarterly filings. I use IRS Direct Pay, which is just like a bank transfer and takes maybe 2 minutes. You can also sign up for EFTPS and schedule your payments in advance.

I must admit, updating my tax estimate spreadsheet every quarter is not a barrel of laughs. But we have enough moving parts that it's a necessary planning activity, especially in 2018 with the tax law changes.

 

[SumDay]

We have taxes withheld from my pension, as I will from SS, and my Vanguard IRA distributions. I hated that quarterly payment process and just prefer to have it handled like a paycheck.

 

[Chuckanut]

I have found the IRS worksheet makes for a pretty good estimate of the withholding amount. Plus or minus about $200. The trick is to get the inputs right.

 

[travelover]

I have taxes withheld from my pension and SS. If I need additional taxes withheld to avoid a penalty due to unexpected income, I take it out of my IRA and have 100% withheld.

 

[jollystomper]

This is my first full year of pension without any earned income so I am figuring it out. Right now I am withholding federal and state taxes from my pension based on the taxes due on the pension amount of my income. I am modeling my 2019 income and taxes to see if I will need to increase that, or pay quarterly taxes, for interest/dividend/cg income. Since I will be withdrawing from my 401K (as I convert portions of it to a Roth IRA) that may a vehicle to withhold additional taxes in lieu of quarterly payments.

 

[Svensk Anga]

We are Roth converting some years (big tax bill at the top of the 22% bracket) and tax gain harvesting in other years (very small tax bill given favored tax treatment of LTCG's). I would be fiddling with w/h once or twice a year to get it right. I figured might as well figure it quarterly and do the estimated payments. It is not much hassle, other than predicting the bill, and you would have that anyway.

 

[Original Wally]

Let them do it. The "value" you gain really isn't that much. I have found that my coffee habit costs more than fine tuning something like that. Enjoy life and let the small poop go.

 

[Austin704]

Thanks everyone for the helpful perspectives. This is such a great forum! I think I’ll just keep it simple initially and have taxes withheld—one less thing to think about as I ease into retirement...

 

[rk911]

we opted for no withholding and pay quarterly estimates. takes me maybe 15-20 minutes to set up the automatic payments with the feds and the state. to avoid an underpayment penalty just pay 100% of what you owed last year. thanks to the new tax law we're getting a somewhat unexpected refund this year...first time in forever...so our quarterly estimates will be adjusted accordingly.

 

[W2R]

we opted for no withholding and pay quarterly estimates. takes me maybe 15-20 minutes to set up the automatic payments with the feds and the state. to avoid an underpayment penalty just pay 100% of what you owed last year. thanks to the new tax law we're getting a somewhat unexpected refund this year...first time in forever...so our quarterly estimates will be adjusted accordingly.

+1
I do the same. It is simpler for me to just not have any taxes withheld individually from each individual income stream (dividends from taxable investments, RMD's from the TSP, pension, Social Security, …, ) , and instead just take a few minutes once a year to set up automatic payments with the IRS and state for quarterly estimated taxes.

 

[kaneohe]

................................. I think I’ll just keep it simple initially and have taxes withheld—one less thing to think about as I ease into retirement...

This thread reminds me of the autopayment of credit cards one. One less thing to think about..........still in that case you do have to remember to review the individual charges and check that are sufficient funds in the bank acct to pay.........or risk the consequences.

In the case of taxes, you do have to think about whether you are withholding enough from all your income streams........if they all withhold, you're probably ok but if you have significant other sources that don't (like DIV/CG), maybe not.