Estimated tax, catchup withholding and penalties

The penalty for underpayments is not that stiff, just 6%.
https://www.irs.gov/newsroom/irs-an...rate-applies-to-most-taxpayers-starting-oct-1

It also means you have to fill out form 2210, which requires you to specify income by quarter. Deductions too, if you itemize. You may also have to fill out 2210 if you make uneven quarterly estimated payments. If your income matches that pattern you'll avoid penalties but you still have to do the form.

I avoid this by making even quarterly estimated payments up to safe harbor, which works even if my income is uneven and/or higher than expected.

If you're going to do the withholding method from a tIRA, be aware that if you aren't 59.5 you'll be penalized for an early IRA withdrawal unless you've found an exception for that.
 
I have money withheld from DH's pension and annuities, from his IRA conversions, and from one of my stock holdings that is still with a transfer agent. When I set up my Treasury Direct account, I asked them to withhold at a high level, although there is not much in there. I may migrate my treasuries over there, although I'm still a bit leery about that. My brokerages don't withhold (other than for conversions). I had asked about this. Last year I rolled part of my refund to this year.

I pay estimated taxes - but due to a larger conversion in the 4th quarter this year, they will not be equal. I didn't withhold from my traditional IRA this year (and don't intend to) so am sailing off larger checks to the IRS and State. I will ask (argue with the accountant) to file the 2210 with explanation. Hopefully, that will be acceptable. :facepalm: Next year I will "assume" that I am making a larger conversion and make (larger but equal) estimated payments.
 
NW-Bound said:
I guess you need to leave some head room, in order to do a Dec-30 withdrawal to square things up.
Click to expand...

Isn’t that crux of the OP. That the strategy is for an ah-oh moment. So if you leave headroom, you likely are pretty on top of things. I run Dinkytown several times throughout the year and track all my income - even the now dreaded new 1099’s from the likes of eBay.
 
NW-Bound said:
My brokerages have online forms that I fill out when making an IRA withdrawal. When I specify that it is a regular withdrawal (for people above 59-1/2), they will send me a 1099 form stating that the amount is taxable.

This info is also sent to the IRS. How do I notify the IRS of my change of intent regarding this withdrawal? Do I need to?
Click to expand...

The procedure is just what you must do for any indirect rollover, sometimes called a "60-day rollover." This link explains it better than I can:
https://www.stratatrust.com/insights/how-to-report-rollovers-on-your-tax-return/

Here is a useful IRS FAQ: https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

And the gory IRS details are here:
https://www.irs.gov/pub/irs-pdf/p590a.pdf
and here:
https://www.irs.gov/publications/p590b

Note that you are limited to one tIRA-to-tIRA indirect rollover per year. (This limit does not apply to rollovers from, say, a 401(k) plan to a tIRA.)
 
Last edited:
Out-to-Lunch said:
Yes, but there is a way around this, too. As we have discussed before, you can make a check out to your tIRA in the same amount as your withdrawal, and deem the whole transaction to be an indirect rollover to your tIRA.
Click to expand...

+1 Agreed that you can use an indirect/60-day rollover back to the IRA that you distributed the money from to pay the withholding tax.

The one thing that you do need to worry about is that you are limited to 1 indirect rollover per year between any of your IRAs - The devil is in the details.

I have taken to putting a reminder on my calendar when I can do the next years rollover with reminders not to do one until then,

-gauss
 
gauss said:
+1 Agreed that you can use an indirect/60-day rollover back to the IRA that you distributed the money from to pay the withholding tax.

The one thing that you do need to worry about is that you are limited to 1 indirect rollover per year between any of your IRAs - The devil is in the details.

I have taken to putting a reminder on my calendar when I can do the next years rollover with reminders not to do one until then,

-gauss
Click to expand...



Same here, my 2021 tIRA distribution was 12/17 so will perform this years on Monday 12/19 to cover spend gap and safe harbor taxes then do 60d rollover later in December to fine tune my 2022 AGI.
 
Out-to-Lunch said:
The procedure is just what you must do for any indirect rollover, sometimes called a "60-day rollover." This link explains it better than I can:
https://www.stratatrust.com/insights/how-to-report-rollovers-on-your-tax-return/

Here is a useful IRS FAQ: https://www.irs.gov/retirement-plans/plan-participant-employee/rollovers-of-retirement-plan-and-ira-distributions

And the gory IRS details are here:
https://www.irs.gov/pub/irs-pdf/p590a.pdf
and here:
https://www.irs.gov/publications/p590b

Note that you are limited to one tIRA-to-tIRA indirect rollover per year. (This limit does not apply to rollovers from, say, a 401(k) plan to a tIRA.)
Click to expand...


I was aware of the indirect rollover, but have always used direct trustee-to-trustee transfer. I was also aware of the 60-day period when you must redeposit the amount, or only a partial amount to an IRA.

What I was trying to ascertain was whether you have to specify at the time of withdrawal whether it is intended as a indirect rollover or a regular withdrawal.

If it turns out that the IRS requires withholding taxes and penalty anyway, then it does not matter. If you keep the money, then they already keep some tax. If you roll-over, then you have to claim the withheld tax back on your tax return.

My brokerage allows me to select "no tax withholding", and does not seem to care if the withdrawal is intended for roll-over or for spending.


PS. I think the once-per-year limit is to prevent people from using the procedure to "borrow" money from their IRA interest-free, then repay it within 60 days.
 
Last edited:
Before I started RMD's, I paid estimated taxes in four equal installments to cover the safe harbor amount. Since RMD's started, I stopped the estimated taxes and have both fed and state safe harbor amounts withheld from my RMD in December. Pretty straight forward.
 
I have never made quarterly estimated tax payments. I withdraw from IRA/401k as needed to refill my checking accounts, and that is done 3 to 5 times a year. I select a reasonable amount of withholding to pay the tax, and that's that.
 
mamadizzy said:
"Withdrawing taxes owed from one's 401K at the end of the year, since it is treated as ongoing withholding, was a technique I learned here that has served me well."

Can anyone explain what exactly this refers to? Thanks
Click to expand...

Since the above quote from my post in the original forum started this kerfuffle :), I walk through what I did this year.

First, I learned that no matter when you pay taxes on a 401K withdrawal, the tax amount is treated as if it has been taken out pro-rated across the year (like a paycheck withholding).

I have a pension that I withhold state and local taxes from to account for the pension amount. I still need to withhold to account for DW's SS, and any interest/dividends/capital gains/conversions from tIRAs to Roths.

My process is to use a spreadsheet, or a good "estimate your taxes" online calculator (like this one: https://www.dinkytown.net/java/1040-tax-calculator.html) or tax software (I use H&R Block) to do a quick 1040 form to look at what Federal taxes I will owe. I do the same for state taxes - my state has an "estimated withholding calculator" that essentially tells you what tax you will owe. I do this in early December, at which time I have already done Roth conversions and (since I use Quicken) I have a good handle on what my interest/dividends/capital gains will be for the year. I also use use published estimates for any mid-late December distributions.

I first complete the forms without including the 401K distribution to see what the taxed owed amount is, then I "play" with 401K distribution amounts to see what level of distribution I need that will cover both all of the taxes owed, including the tax due in the 401K distribution.

At that point it is just the matter of executing the 401K distribution process (with Fidelity) and allocating the amounts to state and local taxes. The only "not optimal" part of this process - I want to take the distribution specifically from the Stable Value fund in my 401K. If I just wanted to do a pro-rated distribution across all funds, I could do the entire process online. But to make a withdrawal from a specific fund, I have to call. Fortunately, the reps I have talked to understand exactly what I want to do, so I am not the only one who uses this process :).

This works for me. I will not be able to convert much, if any, my 401K to Roth before RMDs are due (in 7-8 years for me, depending on legislation) to wanting to stay in the right tax bracket, so this is one way to "draw down" my 401K before RMD time. Of course it is not "working", as my 401K is still larger now that when I retired :). The dollar amount return on the Stable Value fund exceeds what I need to withdraw for taxes. I can leave the equity funds in my 401K alone (I only have 3) for long term growth.

This process may not be optimal for everyone, but when I heard about it on this forum, a "light" went off in my head, and as I looked at my accounts, it made a lot of sense to use this method.
 
youbet said:
Before I started RMD's, I paid estimated taxes in four equal installments to cover the safe harbor amount. Since RMD's started, I stopped the estimated taxes and have both fed and state safe harbor amounts withheld from my RMD in December. Pretty straight forward.
Click to expand...

Same story here, I take QCDs which counts toward the RMD amounts throughout the year. In November / December I do an early cut of my federal tax situation and use the remaining RMD amounts with withholding to meet the safe harbor amounts. Since I have a smallish 401k (federal TSP), for the last two years 100% of the RMD went toward federal tax withholding.
 
jollystomper said:
...
First, I learned that no matter when you pay taxes on a 401K withdrawal, the tax amount is treated as if it has been taken out pro-rated across the year (like a paycheck withholding)...
Click to expand...

I think what happens is that the trustees do not report each individual withdrawal you make throughout the year, and the tax withholding or lack of it. That's a lot of paperwork.

They lump it all in to one report to the IRS at year end.

There are so many tax cheats going on, that the gummint is happy that someone pays his tax. They are not going to hassle someone for not "pay as he goes".
 
Last edited:
We have 2 pensions, dividends, Roth conversions, and some hobby income. We have no withholding of any kind, and we do no quarterly estimated payments.

Instead, as others have posted, I do a tIRA withdrawal each December for our safe harbor amount, instructing Fidelity to withhold 100%. The following January, I repay the IRA from taxable funds and instruct Fidelity to code it as a 60-day rollover. So the original IRA withdrawal is non-taxable.

In effect, we use taxable funds to pay tax each January for the prior year. But it's deemed to have been withheld equally throughout the prior year. So no worries about underwithholding or filing Form 2210. The process is simple and the cash flow is quite favorable.

Each year, I alternate between my IRA and DW's IRA to avoid any potential timing complications associated with the "once per year" restriction on rollovers.

Like others, I learned about this several years ago on this forum.
 
I did some Roth conversions earlier this year, thinking the market was at a low enough point. Wanted max money to go from IRA to the Roth, so specified "no tax withholding". I was going to pay later some other ways, perhaps by withholding more in my withdrawals for spending. Then, I forgot about it.

I will be doing another Roth conversion again, larger and in the 6 figures. I will withhold enough taxes to cover for the earlier conversion. However, still do not have enough info on income to figure out the tax accurately.

So, may have to do another IRA withdrawal on Dec 30 to square things up, if I have enough info then. Or I can just overpay taxes by a few $1000. It's no big deal. I overpaid last year by $1500 or so, and just specified in my tax return that it was advanced tax payment for next year.
 
Well, I was not not not going to "roll" but - it seems once again I have changed my mind. :blush:

I opened up a traditional IRA at Fidelity (no funds are necessary to open - but I put in for a transfer of $100 from my Vanguard IRA).

I am next going to take a distribution from my Vanguard IRA - and have 84 percent withheld for the feds, and 16 percent for NYS. (A 100 percent withdrawal is not allowed).

Next week, I am taking a check from a taxable / non-IRA account down to Fidelity in person for the amount of the entire distribution, (with their form) and depositing it into the newly created IRA as a 60 day Rollover. From looking at the IRS Code, this would made the entire "distribution" non-taxable while the tax paid would be considered to have been made timely - and no funds were withheld from Roth conversions.

So, it is my understanding that this allows all conversion money to go into the Roth, without raising my taxes beyond the amount of the conversions.
 
Last edited:
I was curious about the argument over whether paying taxes at the end of the year by withholding 100% of an IRA distribution is a legal approach to taxes or a technical violation that taxpayers can get away with (e.g. like slow rolling a stop sign or driving 9 MPH over). Unfortunately, I couldn't find any definitive answer. I did find articles, like this one at Kiplinger, that recommend the approach for paying all taxes. They all say the IRS treats the late taxes as having been withheld over the entire year. That doesn't prove that it is legit but I couldn't find any articles or advice saying it is not legit. Instead of asking for proof that it is OK, I would assume that, in light of the common practice with no rulings to the contrary, it is reasonable to assume that it is legit and apply Judge Hand's reasoning that it is not a sin.
 
donheff said:
I was curious about the argument over whether paying taxes at the end of the year by withholding 100% of an IRA distribution is a legal approach to taxes or a technical violation that taxpayers can get away with (e.g. like slow rolling a stop sign or driving 9 MPH over). Unfortunately, I couldn't find any definitive answer. I did find articles, like this one at Kiplinger, that recommend the approach for paying all taxes. They all say the IRS treats the late taxes as having been withheld over the entire year. That doesn't prove that it is legit but I couldn't find any articles or advice saying it is not legit. Instead of asking for proof that it is OK, I would assume that, in light of the common practice with no rulings to the contrary, it is reasonable to assume that it is legit and apply Judge Hand's reasoning that it is not a sin.
Click to expand...

According to The Tax Adviser website (an AICPA publication), section 3405(f) of the IRC states that withholding from pensions, annuities, and other deferred income are to be treated same as wage withholding... meaning it is deemed to be spread evenly.

All I know is: I get a 1099-R from Fidelity with a big number in box 4 (Federal income tax withheld). I plug it into TurboTax and all is well. Just like withholding from W-2 wages, nobody cares WHEN it was withheld.

RunningBum said:
...If you're going to do the withholding method from a tIRA, be aware that if you aren't 59.5 you'll be penalized for an early IRA withdrawal unless you've found an exception for that.
Click to expand...

The Tax Adviser website also states that you can use this strategy before age 59.5 with no 10% penalty as long as you do the 2-step version: IRA WD w/ 100% WH, plus 60-day rollover from taxable.
 
MarieIG said:
Well, I was not not not going to "roll" but - it seems once again I have changed my mind. :blush:

I opened up a traditional IRA at Fidelity (no funds are necessary to open - but I put in for a transfer of $100 from my Vanguard IRA).

I am next going to take a distribution from my Vanguard IRA - and have 84 percent withheld for the feds, and 16 percent for NYS. (A 100 percent withdrawal is not allowed).

Next week, I am taking a check from a taxable / non-IRA account down to Fidelity in person for the amount of the entire distribution, (with their form) and depositing it into the newly created IRA as a 60 day Rollover. From looking at the IRS Code, this would made the entire "distribution" non-taxable while the tax paid would be considered to have been made timely - and no funds were withheld from Roth conversions.

So, it is my understanding that this allows all conversion money to go into the Roth, without raising my taxes beyond the amount of the conversions.
Click to expand...

Did you also do a Roth conversion that you did not mention in this post? I.e., is a separate Roth conversion what you are trying to pay the taxes for with this maneuver? (I am assuming so.)

If so, yes, that is the right procedure. Just remember that you can only do this once per year from tIRA to tIRA.
 
Out-to-Lunch said:
Did you also do a Roth conversion that you did not mention in this post? I.e., is a separate Roth conversion what you are trying to pay the taxes for with this maneuver? (I am assuming so.)

If so, yes, that is the right procedure. Just remember that you can only do this once per year from tIRA to tIRA.
Click to expand...

Yes - I have done Roth conversions separately. I exceeded my expectations with Roth conversions this last quarter. I prefer to pay the tax out of a non-IRA, so as to maximize the amount of my conversions without raising my tax level even more.

I have never done this before so I should be ok for this year . . .
 
MarieIG said:
Yes - I have done Roth conversions separately. I exceeded my expectations with Roth conversions this last quarter. I prefer to pay the tax out of a non-IRA, so as to maximize the amount of my conversions without raising my tax level even more.

I have never done this before so I should be ok for this year . . .
Click to expand...

P.S. If one really, really dug down on this, I paid the taxes timely, i.e. the extra when the income was earned (i.e. by the conversion). I just prefer to do every thing I am supposed to do - and fly quietly under the radar.
 
Ok - done.

I did it online, and then called a Vanguard rep to confirm that the $ would be withheld for NYS.

He said Vanguard has direct communication with the IRS, so those funds and processed more quickly. He also laughed at me and said, I don't usually hear someone say "I want to pay my taxes."
 
I'm trying to understand this but am coming up short.

Let me propose a basic scenario with made up numbers:

You receive $24k a year in Social Security.
You draw $2k a month from a tIRA.
You have after-tax investments that will yield $10k in dividends/CGD's for the year.

You know that you will owe $2885 in federal taxes (Single, no dependents) and want to pay those taxes using after-tax dollars.

How would you do so?
 
You must log in or register to reply here.

Similar threads

ShokWaveRider
What is the best way to pay estimated Federal Taxes in Retirement?
5 6 7
Replies
159
Views
9K
RetiredHappy
R
C
LLC Consulting Taxes
Replies
22
Views
1K
G-Man
G
A
Is the IRS intentionally this obtuse???
2
Replies
30
Views
3K
indiajust
I
O
Tax return changed and IRS notification
Replies
4
Views
460
oldphd
O
J
Prior Tax Return SNAFU
Replies
7
Views
759
jimbohoward69
J

Latest posts

Back
Top Bottom