Paying Taxes in Retirement With Tax Withholding Distributions

[Jerry1]

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.

This might be bad advice. Before the end of the year, you should have a handle on your taxes. You should either know that you’re covered under the hold harmless rules or you should make an estimate of your tax liability and make either estimated payments or withholdings to cover the liability. Otherwise, you risk paying interest and penalty when you file your taxes.

Maybe your advisor is certain that you are covered by the hold harmless provisions. In that case, the advice to wait until you do your taxes is correct.

 

[TheWizard]

This might be bad advice. Before the end of the year, you should have a handle on your taxes. You should either know that you’re covered under the hold harmless rules or you should make an estimate of your tax liability and make either estimated payments or withholdings to cover the liability. Otherwise, you risk paying interest and penalty when you file your taxes.

Maybe your advisor is certain that you are covered by the hold harmless provisions. In that case, the advice to wait until you do your taxes is correct.

By hold harmless, you mean a safe harbor situation.

After I do my 2023 Roth conversion next week, I'll go over to EFTPS and submit an estimated payment to cover most of it...

 

[30yeardraw]

Hi,
Is it ok to make a one time payment at the end of the year to the IRS?

I thought I might try that first.

Thanks.

 

[Jerry1]

By hold harmless, you mean a safe harbor situation.

Yes. Sorry. I worked in an industry that had similar provisions and we titled them Hold Harmless. Safe Harbor is the correct term in regards to taxes.

 

[Rjhasti]

Jerry1
Since you worked in that industry..........should I go to EFTPS and make a tax payment on my $25k conversion or just wait till I do my taxes in Feb?

 

[OldShooter]

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.

Reporting back: Schwab guy called me and said the web interface for distributions is the same for tIRAs and for Roths, so I can withhold from a Roth distribution just by checking the boxes like I do for tIRA.

 

[jazz4cash]

Reporting back: Schwab guy called me and said the web interface for distributions is the same for tIRAs and for Roths, so I can withhold from a Roth distribution just by checking the boxes like I do for tIRA.

I was curious to see how Fidelity handles withholding from a Roth distribution. Indeed Fido’s interface also looks the same as for tIRA distributions. I can select a percentage to be withheld for Fed taxes and a separate selection for state withholding. The default is 0%. I think these defaults vary by account type, age, and dtate withholding requirements.

 

[Jerry1]

Jerry1
Since you worked in that industry..........should I go to EFTPS and make a tax payment on my $25k conversion or just wait till I do my taxes in Feb?

It depends on whether you will meet the safe harbor requirements. If you meet safe harbor, the you can wait until you file your taxes. If you don’t expect to meet the safe harbor requirements then you should make an estimated payment.

Safe harbor means you have to either:
- Pay 90% of the current year (2023) tax, or
- Pay 100% of last year’s (2022) tax, or
- Pay 110% of last year’s (2022) tax if your agi is greater than $150K.

You should really understand safe harbor, not only for this question, but into the future. I hate paying a penalty.

If you didn’t think about safe harbor you likely haven’t paid in enough (or won’t before year end). So, be careful. It may be safer to make the extra estimated payment.

Also, if you took the conversion in the last quarter and pay the estimate, you may have to do a little extra work when you file your taxes to show that your income was not proportional throughout the year.

 

[Gumby]

Hi,
Is it ok to make a one time payment at the end of the year to the IRS?

I thought I might try that first.

Thanks.

I'm not sure that will work. Estimated payments must generally paid in four equal installments on or before the four dates specified. Thus, even if you paid the correct amount in one 4th quarter payment, you may still be penalized. See https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes The benefit of taking a tIRA distribution and having it withheld for taxes is that such withholding is considered to have been paid evenly over the course of the year.

 

[Rjhasti]

But if you converted in Dec then obviously you only have the month of Dec to pay the estimated tax.........correct?

 

[Jerry1]

Hi,
Is it ok to make a one time payment at the end of the year to the IRS?

I thought I might try that first.

Thanks.

I'm not sure that will work. Estimated payments must generally paid in four equal installments on or before the four dates specified. Thus, even if you paid the correct amount in one 4th quarter payment, you may still be penalized. See https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes The benefit of taking a tIRA distribution and having it withheld for taxes is that such withholding is considered to have been paid evenly over the course of the year.

It most definitely will not work. Income is assumed to come in evenly throughout the year. Payments (quarterly or withholding) are consistent with that assumption.

IF you had no other income and took an IRA distribution in the last quarter then it would work to make one payment in the last quarter. You’d have to fill out form 2210 to annualize your income.

 

[Gumby]

But if you converted in Dec then obviously you only have the month of Dec to pay the estimated tax.........correct?

If that's your only taxable income for the year, you would be correct, but it is a paperwork hassle because you have to explain it to the IRS when you file your taxes.

I have pension, social security and other income throughout the year and I also do conversions a various times. If it gets toward the end of the year and it looks like I may not have withheld enough already, I do a December tIRA distribution and allocate it 99% to pay taxes (Vanguard requires that I receive 1% - don't know why). Of course, I need to gross up that distribution to account for the taxes that will need to be paid on the distribution itself.

 

[CRLLS]

Reporting back: Schwab guy called me and said the web interface for distributions is the same for tIRAs and for Roths, so I can withhold from a Roth distribution just by checking the boxes like I do for tIRA.

Thanks. You're doing better than I am. My Fido guy has not replied to me yet. I guess Jazz4cash has it covered. Paying tax from a Roth instead of a tIRA would mean that we don't have to rush to replenish (rollover) before the end of the year. It should not affect ACA or IRMMA. Doing so with a tIRA might. (I think)

 

[Mountain Climber]

Reporting back: Schwab guy called me and said the web interface for distributions is the same for tIRAs and for Roths, so I can withhold from a Roth distribution just by checking the boxes like I do for tIRA.

This is good news. Was he able to verify whether the withholding from a Roth will meet the rules of being equally paid throughout the year?

 

[RetireBy90]

If that's your only taxable income for the year, you would be correct, but it is a paperwork hassle because you have to explain it to the IRS when you file your taxes.

I have pension, social security and other income throughout the year and I also do conversions a various times. If it gets toward the end of the year and it looks like I may not have withheld enough already, I do a December tIRA distribution and allocate it 99% to pay taxes (Vanguard requires that I receive 1% - don't know why). Of course, I need to gross up that distribution to account for the taxes that will need to be paid on the distribution itself.

Fidelity is the same, only lets me withhold 99%

 

[Chuckanut]

Just be careful you don't trigger an IRMAA charge by selling shares held in a tIRA account. It's still income even if it goes straight to the IRS and you never see a cent.

 

[CRLLS]

Fidelity is the same, only lets me withhold 99%

99%? I could swear that during my past IRA to Roth conversions, Fido makes 2 separate transactions. The 1st transaction goes to the Roth and the 2nd transaction, of which 100% goes to taxes. I have only done conversions thru a live person on the other end of the phone. Perhaps that has something to do with the extra 1%. I've never used the online form.

 

[jazz4cash]

Thanks. You're doing better than I am. My Fido guy has not replied to me yet. I guess Jazz4cash has it covered. Paying tax from a Roth instead of a tIRA would mean that we don't have to rush to replenish (rollover) before the end of the year. It should not affect ACA or IRMMA. Doing so with a tIRA might. (I think)

Just to be clear, I did not aak anyone at Fidelity. I simulated a distrubution request but cancelled without submitting.
You have raised some interesting ideas that I’ve just started thinking about, ie what scenario this is suitable for.

 

[statsman]

If it gets toward the end of the year and it looks like I may not have withheld enough already, I do a December tIRA distribution and allocate it 99% to pay taxes (Vanguard requires that I receive 1% - don't know why).

Fidelity is the same, only lets me withhold 99%

This is good to know.

I have a modest pension that I withhold taxes on. That usually suffices, but this year, I got caught off-guard by the spiking earned interest on our MM accounts and CDs. So, we have a small tax deficit that needs to be made up.

I also have a small inherited IRA with a small RMD. With the RMD's amount added to gross income, there's enough there to cover the tax deficit if I withhold a touch over 50% for Federal taxes. I didn't know if Vanguard or Fidelity allowed this high of a withholding rate.

 

[Involuntary Retiree]

Fidelity is the same, only lets me withhold 99%

If you call Fido's customer service number, the pleasant young rep who answers can set your withholding to whatever you want.



I moved my retirement accounts to Fidelity this year, so I'm a novice at their system. Yesterday, I was trying to do 100% withholding from my TIRA on the Fidelity website, with no withholding to my state taxing authority. The system would only let me do 99% though, and if I withheld federal, the system required me to withhold at least 5% to my state. I called today to inquire if there was a way to make the system do what I wanted. The rep said, "I can do it!" And, he did.



So, if Fidelity's online system isn't doing what you want, just call them.

 

[Montecfo]

It most definitely will not work. Income is assumed to come in evenly throughout the year. Payments (quarterly or withholding) are consistent with that assumption.

IF you had no other income and took an IRA distribution in the last quarter then it would work to make one payment in the last quarter. You’d have to fill out form 2210 to annualize your income.

Yes the income is assumed to have occurred steadily bur the taxpayer need not follow this assumption. Form 2210 allows you to use actual income as an alternative calculation for quarterly payments, as you suggest in last couple of sentences.

 

[rayvt]

This is good news. Was he able to verify whether the withholding from a Roth will meet the rules of being equally paid throughout the year?

There is no "rules of being equally paid throughout the year". That's a mis-statement that somehow got started.

The actual rule is "If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return."

Note that while it talks about estimated tax payments being late, it doesn't say anything about timing of withholdings.

What you have to pay on April 15 is your tax minus your withholdings. They don't pay any attention to when the withholding(s) were made, just the total amount withheld.

Pub 505 covers this.
_______________________________________

Hi,
Is it ok to make a one time payment at the end of the year to the IRS?

Nope. A payment is not a withholding, and is subject to the quarterly rules.

 

[Jerry1]

There is no "rules of being equally paid throughout the year". That's a mis-statement that somehow got started.

The actual rule is "If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return."

Note that while it talks about estimated tax payments being late, it doesn't say anything about timing of withholdings.

What you have to pay on April 15 is your tax minus your withholdings. They don't pay any attention to when the withholding(s) were made, just the total amount withheld.

Pub 505 covers this.
_______________________________________



Nope. A payment is not a withholding, and is subject to the quarterly rules.

There are rules about paying equally throughout the year. They’re based on the assumption that income is generated equally throughout the year. If your income stream is not actually equal through the year, then it is entirely appropriate to file form 2210 and show that your income came in unevenly throughout the year. In that case, then you need to show that your payments matched the timing of your income stream.

The general rule is that your payments should coincide with your income. The fact that withholding is handled as received evenly throughout the year is a quirk, one that can be utilized to manage payments.

 

[Mountain Climber]

There is no "rules of being equally paid throughout the year". That's a mis-statement that somehow got started.

The actual rule is "If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return."

Note that while it talks about estimated tax payments being late, it doesn't say anything about timing of withholdings.

What you have to pay on April 15 is your tax minus your withholdings. They don't pay any attention to when the withholding(s) were made, just the total amount withheld.

Pub 505 covers this.
_______________________________________


Thanks for the explanation. The option of using Roth withholdings seems reasonable to avoid tax penalties/interest.

 

[Gumby]

You're going to have to take money out of your tIRA eventually (RMDs). If there is room under the next IRMAA threshold, you might consider taking it now and using a distribution from tIRA to do this withholding rather than from the Roth. You just need to remember to gross up to account for the taxes on the distribution itself.