Paying Taxes in Retirement With Tax Withholding Distributions

[Jerry1]

This is simply to pay the year’s tax by withholding which is not subject to timing rules. By replacing the money within 60 days it is no longer income and his IRA is back to the original amount.

It is simply a way to take advantage of IRA tax withholding yet at the same time not take a taxable IRA distribution.

Thanks for reminding me of this. In doing my year end work, I determined I was over the 12% bracket in income, which I try to stay below. Thankfully, I did my withdrawal/withholding less than 60 days ago so I can at least put that back in my IRA and not have to be taxed at 22% for those dollars.

The withdrawal was $8500 so at 22%, I’ll save $1870. Plus, I’ll save 4.25 for state - $361. So a savings of $2231.

 

[jazz4cash]

Thanks for reminding me of this. In doing my year end work, I determined I was over the 12% bracket in income, which I try to stay below. Thankfully, I did my withdrawal/withholding less than 60 days ago so I can at least put that back in my IRA and not have to be taxed at 22% for those dollars.

The withdrawal was $8500 so at 22%, I’ll save $1870. Plus, I’ll save 4.25 for state - $361. So a savings of $2231.

Is the entire $8500 above the 12% threshold? Only the amount in excess of the 12% bracket gets taxed at the higher rate. You may be able to get back to the 12% bracket with a smaller repayment to your IRA.

 

[Jerry1]

Is the entire $8500 above the 12% threshold? Only the amount in excess of the 12% bracket gets taxed at the higher rate. You may be able to get back to the 12% bracket with a smaller repayment to your IRA.

Yes, the entire amount is over. Taking it back gets me very close to not going over but unfortunately, I messed up and forgot I took out $20K earlier in the year to buy some iBonds.

 

[jazz4cash]

Yes, the entire amount is over. Taking it back gets me very close to not going over but unfortunately, I messed up and forgot I took out $20K earlier in the year to buy some iBonds.

I use an excel spreadsheet to track distributions, rollovers, withholding, etc. I just realized I ‘forgot’ to pay estimated state taxes from a distribution this year. I also got an unexpected state refund for taxes withheld but not claimed in 2022. Clearly I am getting lazy and not even reading my spreadsheet.

 

[Jerry1]

I use an excel spreadsheet to track distributions, rollovers, withholding, etc. I just realized I ‘forgot’ to pay estimated state taxes from a distribution this year. I also got an unexpected state refund for taxes withheld but not claimed in 2022. Clearly I am getting lazy and not even reading my spreadsheet.

I dropped the ball because of the way the money moved. It was taken from my IRA and put into my taxable account. Then it went from the taxable account to the checking account at my credit union. So the statement showed a transfer out of the IRA and a withdrawal from the taxable account. I focused on the taxable account and forgot it actually came out of the IRA.

 

[flyingaway]

Please help me understand the whole process. An example

1) I withdrew $50K from my IRA in November with no tax paid.
2) I realized that I need to pay $8,000 federal tax and $1,000 state tax in December.
3) I put $9,000 back to IRA from my taxable account. (Is this the rollover?)
4) I "withdraw" $9,000 from IRA, but withholding 100% for tax. How do they know how much is for federal tax and how much is for state tax?

I am completely unaware of this strategy and it looks interesting to me.

 

[Jerry1]

Please help me understand the whole process.

To me, the process starts with the IRS safe harbor provision. Safe harbor is what you have to do to prevent receiving a penalty for underpayment of taxes. You can:
a. pay in 90% of your current year (2023) tax liability.
b. pay in 100% of last years tax liability or 110% if your agi is over $150K.

Here's what I did.

Throughout the year, I have an amount withheld from my pension. Let's say that totals $3K Fed and $1K State. Assume my 2022 tax liability was $8K for Fed and $3.5K for State. Therefore, I needed $8.5K more to be withheld - $5K Fed and $2.5K State. Now I'm good for safe harbor. If my taxes are more in 2023, I'll just pay it with my return in April. No penalty and I didn't have to estimate my taxes or pay estimated taxes throughout the year.

I took that money from my IRA and had my representative send $5K to the Fed and $2.5K to the State. The withdrawal was 100% withholding.

Then, I did estimate my year end income to see where I was versus the 12% tax bracket. My goal is to hit that level of income. If I'm low, I'll do a ROTH conversion. If I'm over, I messed up. Not much I can do about that.

Except, I realize, thanks to this thread, that I can at least put the $8.5K back in my IRA (thankfully, I was still within the 60 days) and save paying the 22% on that amount. So I called my rep today and had them pull $8.5K out of my checking and consider it a rollover into my IRA.

A little different than your example, but that's what happened.

In simple terms, the strategy is this:
Pay in enough to cover safe harbor. One could pay no taxes throughout the year and then do a withdrawal from your IRA at 100% withholding before year end to cover safe harbor. Then, turn around and pay that money back to your IRA (from a taxable account) and not have to pay tax on that withdrawal. You'd want to do this in the same year to simplify tax return preparation.

Hope that answers your question.

 

[RetireBy90]

Please help me understand the whole process. An example

1) I withdrew $50K from my IRA in November with no tax paid.
2) I realized that I need to pay $8,000 federal tax and $1,000 state tax in December.
3) I put $9,000 back to IRA from my taxable account. (Is this the rollover?)
4) I "withdraw" $9,000 from IRA, but withholding 100% for tax. How do they know how much is for federal tax and how much is for state tax?

I am completely unaware of this strategy and it looks interesting to me.

As for how much is for federal and how much for state, with Fidelity there is an election when you make the withdraw for how much to withhold for fed and another for how much to withhold for state. 2 separate elections so you can split how ever you want. 88% fed and 12% state in this example. I'm sure each firm is slightly different in the withdraw process, this is how Fido does it. I'm sure your firm will have a similar process.

 

[1242Vintage]

I manage Mom’s finances and have a large percentage withheld on RMDs to pay State and Fed taxes. Learned this approach here. This nicely avoids the PITA caused be q’tly taxes (remembering dates for q’tly taxes and making sure Mom has sufficient funds in her checking acct to cover them).

For my taxes I have two seasonal and very part-time engineering consulting gigs and have a majority of compensation for that work set aside in withholdings to cover taxes.