Paying Taxes in Retirement With Tax Withholding Distributions

[Jerry1]

I started the safe harbor method this year. I have some withholding from my pension. I took that into consideration and had a withdrawal at 100% withholding for the difference to get to 100% of last year’s taxes. In my case, it works the same way for the state so I did the same there.

My income is stable enough now that this will work just fine. If I ever have a large swing in my income, I would do more to calculate my estimated taxes. If I’m going to owe more money, I’m not worried about that. I’ll just pay it in April. But, if my income decreases significantly, I’d consider doing a smaller withdrawal/withholding.

 

[Montecfo]

I understand the replenishment isn't taxable immediately, but down the road isn't it simply in the traditional IRA and therefore taxable when I withdraw two years later?

It is taxable when you withdraw unless funds returned as I described, sure.

But that is the same spot you were in before. Essentially, that is the definition of a traditional IRA.

 

[Dtail]

Not quite sure what you are asking.

There is no "RMD withholding".
There is IRA withdrawals.
There is amount withheld from the withdrawal.
Separately, there is the minimum amount you are required to withdraw.

Do you mean if you withdraw more than your RMD? Or more than the safe harbor tax?

Money is fungible, so it does not matter where the money came from to pay the tax due to Roth conversions.

You cannot do Roth conversions until you have taken your RMD.
(Well actually you can, since the 1099 and 5498 forms don't have the dates of the individual transactions, just the sums for the entire year. But if the IRS dig into your details they will find out and can hit you with nasty penalties.)

So yes I mean that for the RMD withdrawal, I effectively withheld more monies than was needed to pay taxes on the withdrawal or regular taxes.
The real example should make it clearer.

RMD mandated withdrawal 28k (already completed)
Federal Taxes withheld 15k (9.5k withheld taxes would have covered the full 2023 taxes owed)
Roth conversion proposal 30k (the extra 6.5k withheld from the RMD would be used to cover the conversion)

I guess using the money fungible concept and doing the Roth conversion after the RMD, it should be good.
Please confirm.

 

[30yeardraw]

Hi,

This is timely information. It sounds like what i need to do.
I did a lot of Roth conversions and withdrawals this year.

I would like to withdraw and give it to the IRS, but not increase my income this year.

If I withdraw 10k on Dec 11 and 100% goes to taxes. On Dec 12 return the 10k to my IRA, I am all set. I have not increased my income but gave the IRS their share this year.

What is the main reason for waiting till January?

Looks like I could find an IRS office and give them a check before the 15th, if they are even in the office anymore.

Thanks for the help

 

[Romer]

Another great thread useful for members.

I likely won't use the replenishment aspect.

For the last two years I tried to make withdrawals by quarter as I thought that was when you had to pay taxes. Now I know I can do it in December. I still need to plan items with IRMMA in mind. Now I also know if paying taxes trip a threshold, there is a replenishment option to use as a tool

Thanks for the knowledge that paying taxes out off an IRA withdrawal can be done any time in the year and does not have to follow the quarterly requirement when paying directly.

 

[CRLLS]

I did skim over this topic. I admit I did not confirm the math. I get the reason for one-time withdrawal from an IRA with 100% withheld to cover the year's taxes. I wonder what the reason is for following up with the 60 day repayment. Doesn't that keep the tIRA higher, thus incurring higher RMDs later?

With regard to RMD times, wouldn't it be simpler to pay the year's tax in Dec from a Roth IRA and then reimburse (aka rollover) with other money instead of using a tIRA? Yes, it still keeps the tIRA higher. By doing this via Roth, one's AGI would not be higher, incurring higher taxes and possibly triggering IRMMA. Maybe I missed that point? Can a withdrawal from a Roth be designated as a tax payment and meet the rules of being equally paid throughout the year, even though tax is not required?

 

[OldShooter]

... Can a withdrawal from a Roth be designated as a tax payment and meet the rules of being equally paid throughout the year, even though tax is not required?

I would be interested to know if someone has the answer to this question, too. I have a Roth that I would like to tap for some of our needed withholding.

Edit: I just emailed my Schwab guy with the question. I'll report back.

 

[tsoispf]

That is how I pay my taxes. One big withholding near the end of the year. Seems to work fine
I do not need to bother with using the 60 day rollover angle since my taxable balance is small.

Ditto. I've been withholding both state and federal taxes this way since I retired (4 years ago). It's convenient and never been and issue when filing.

 

[CRLLS]

I would be interested to know if someone has the answer to this question, too. I have a Roth that I would like to tap for some of our needed withholding.

Edit: I just emailed my Schwab guy with the question. I'll report back.

I just did with my Fido guy. THis is how I asked the question. I'll report also.

Can I make a single Roth withdrawal and elect to have 100% of it withheld as federal taxes? The intended purpose is to have the withdrawal treated as paid evenly throughout the year as it would be if taken from a traditional Roth. I believe that this would prevent any penalty for not paying quarterly.

2nd question: Can I then redeposit the exact amount from another source back into the Roth within 60 days. I think it would be treated as a Roth conversion, if I get the IRS jargon correct.

I think the answer to both are yes, but I’d like to see how Fidelity thinks/operates. I haven’t done any Roth withdrawals so I do not know what the options are on Fidelity’s forms/pages. If you agree please direct me to the appropriate webpages.

 

[N02L84ER]

It would be a Roth rollover not a Roth conversion.

 

[rayvt]

I wonder what the reason is for following up with the 60 day repayment. Doesn't that keep the tIRA higher, thus incurring higher RMDs later?

There are 2 reasons. 1) Reverse the withdrawal and therefore negate the tax on the withdrawal that is 100% withheld. 2) Shift the actual withdrawal to January of the next year, so it counts toward the RMD that begins anew on Jan 1.

With regard to RMD times, wouldn't it be simpler to pay the year's tax in Dec from a Roth IRA and then reimburse (aka rollover) with other money instead of using a tIRA? Yes, it still keeps the tIRA higher. By doing this via Roth, one's AGI would not be higher, incurring higher taxes and possibly triggering IRMMA. Maybe I missed that point? Can a withdrawal from a Roth be designated as a tax payment and meet the rules of being equally paid throughout the year, even though tax is not required?

From googling, the IRS says that withholding from a Roth is optional. But IRA custodians sometimes have funny rules and procedures -- and interpretations -- about optional IRS things. A broker might not even have a place to fill in for tax withholding from a Roth distribution.

Whether you do it from a Roth or from a TIRA and do 60-day rollover, it does not count towards IRMMA.

I would not sweat too much about higher IRA size and thus higher RMD going forward. Over a multi-year period it pretty much balances out.

 

[rayvt]

So yes I mean that for the RMD withdrawal, I effectively withheld more monies than was needed to pay taxes on the withdrawal or regular taxes.
The real example should make it clearer.

RMD mandated withdrawal 28k (already completed)
Federal Taxes withheld 15k (9.5k withheld taxes would have covered the full 2023 taxes owed)
Roth conversion proposal 30k (the extra 6.5k withheld from the RMD would be used to cover the conversion)

I guess using the money fungible concept and doing the Roth conversion after the RMD, it should be good.
Please confirm.

Sounds good.
Don't overthink it. Withholding done from an IRA withdrawal is no different than making quarterly payments. Except that withholdings are deemed to be timely no matter when paid.
For most E.R. & F.I. people, the only way to have a large withholding is from an IRA withdrawal.

 

[rayvt]

Hi,
If I withdraw 10k on Dec 11 and 100% goes to taxes. On Dec 12 return the 10k to my IRA, I am all set. I have not increased my income but gave the IRS their share this year.

What is the main reason for waiting till January?

So that the effective date of the withdrawal (for the 60-day rollover) is in the next year. This keeps it out of this year's income as well as counting toward the RMD of the next year.

------------

So say you estimate your tax and withdraw/withhold $10,000 to cover it. But that adds $10,000 to your income and increases your tax by $1,200 or $2,200. Oh no! now you must increase the withdraw to cover that. But that adds even more to your income so you have to withdraw even more to cover that. All in late December with a hard cutoff date on Dec 31. Ugh.

Much simpler to push the effective withdrawal to next year.

 

[CRLLS]

There are 2 reasons. 1) Reverse the withdrawal and therefore negate the tax on the withdrawal that is 100% withheld. 2) Shift the actual withdrawal to January of the next year, so it counts toward the RMD that begins anew on Jan 1.



From googling, the IRS says that withholding from a Roth is optional. But IRA custodians sometimes have funny rules and procedures -- and interpretations -- about optional IRS things. A broker might not even have a place to fill in for tax withholding from a Roth distribution.

Whether you do it from a Roth or from a TIRA and do 60-day rollover, it does not count towards IRMMA.

I would not sweat too much about higher IRA size and thus higher RMD going forward. Over a multi-year period it pretty much balances out.

Likely could be as you say, a non-issue WRT IRMMA, However if the withdrawal was from a tIRA and done in Dec and the rollover was done next tax year in Jan, I would think that IRMMA is an issue. I will admit that I don't really know. With a Roth it would not be an issue, I think.

 

[Mountain Climber]

I would be interested to know if someone has the answer to this question, too. I have a Roth that I would like to tap for some of our needed withholding.

Edit: I just emailed my Schwab guy with the question. I'll report back.

Just curious - why would taking the money from the Roth be any different from taking it from any other savings/post-tax accounts?

 

[Jerry1]

Just curious - why would taking the money from the Roth be any different from taking it from any other savings/post-tax accounts?

It’s different if you can get it labeled as withholding for your taxes. Withholding is treated as received throughout the year. You can make a large payment near the end of the year and it’s treated as if it were paid evenly throughout the year. You can’t do that with an after tax account withdrawal.

 

[CRLLS]

If it is possible and the "rollover" (Roth repayment) is done in the next year then a qualified distributions from the Roth IRA might not affect your MAGI and any income related programs such as ACA subsidy or IRMMA. At least that is what I am hoping for. It is early and I have not heard from my Fido guy yet.

 

[Mountain Climber]

It’s different if you can get it labeled as withholding for your taxes. Withholding is treated as received throughout the year. You can make a large payment near the end of the year and it’s treated as if it were paid evenly throughout the year. You can’t do that with an after tax account withdrawal.

Yes, I get that part. Sorry, I think I asked my question poorly.

My question is why would someone think that Roth money would count differently from any other post-tax asset in fulfilling tax obligations? It seems to me that quarterly payments are the vehicle for paying tax obligations with post-tax assets, including Roth assets, if you want to avoid penalties/interest. Is there some aspect of Roth accounts that would make them different from any other post-tax asset?

 

[OldShooter]

Just curious - why would taking the money from the Roth be any different from taking it from any other savings/post-tax accounts?

Possibly the broker software does not offer the option of specifying withholding since it's a non taxable distribution.

 

[CRLLS]

Yes, I get that part. Sorry, I think I asked my question poorly.

My question is why would someone think that Roth money would count differently from any other post-tax asset in fulfilling tax obligations? It seems to me that quarterly payments are the vehicle for paying tax obligations with post-tax assets, including Roth assets, if you want to avoid penalties/interest. Is there some aspect of Roth accounts that would make them different from any other post-tax asset?

By definition, a Roth IRA is different from other post-tax assets. This treatment is no different than other retirement accounts such as a tRIA, 401K and possibly other pre-tax retirement accounts. I don't know why the IRS counts a single tIRA withdrawal tax as being paid evenly over the year, but it does. Maybe that should be the question.

 

[TheWizard]

With estimated tax payments, a payment made in the first two weeks of January, 2024 applies to your 2023 tax year.
I understand that.

But if I withdraw $10k from my tIRA to my checking account on January 10, 2024, that's definitely ordinary income for 2024. No way to frame that as 2023 income.
But if I have 100% of that $10k withheld for Federal taxes, if there an option for applying it to 2023?

 

[OldShooter]

... But if I have 100% of that $10k withheld for Federal taxes, if there an option for applying it to 2023?

I doubt it. It will probably be shown on your 2024 1099 as withholding and will be passed to the IRS as a 2024 payment. You could check with your broker I guess. They control what/when/how the 1099s are printed and what the IRS is told.

I've been doing this for several years and don't recall ever being asked what year I want the payment credited to.

 

[Dtail]

Sounds good.
Don't overthink it. Withholding done from an IRA withdrawal is no different than making quarterly payments. Except that withholdings are deemed to be timely no matter when paid.
For most E.R. & F.I. people, the only way to have a large withholding is from an IRA withdrawal.

Thanks.

 

[rayvt]

I don't know why the IRS counts a single tIRA withdrawal tax as being paid evenly over the year, but it does. Maybe that should be the question.

What you called "withdrawal tax" is withholding. Here's what the IRS says:

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings

In another IRS publication they say that for withholding purposes, distributions (withdrawals) from pensions & IRAs & 401Ks are treated as if they were wages.

The reason to have anything at all withheld is to avoid the underpayment penalty. The IRS just looks at the total amount withheld, not the timing of the withholdings.

[edit] From https://www.irs.gov/individuals/employees/tax-withholding "If you don’t pay your taxes through withholding, or don’t pay enough tax that way, you may have to pay estimated tax." "Avoid a surprise at tax time and check your withholding amount. Too little can lead to a tax bill or penalty."

 

[Rjhasti]

This is a very real thing out there that I have gotten such a varied amount of opinions from so called professionals. Here was my question to them:
"I am going to do a Roth Conversion of $25,000 which still keeps me in the 12% tax bracket.......when do I pay the tax?"
Pretty straight forward.........but several CFP's, you tubers and Fidelity all said to wait till you do your taxes in Feb and then you just pay it then.
But yet when you look it up on the IRS web site it says just like the quote above.
Very confusing.............so I did the conversion last week and we will see. I will post the result in Feb.