Can someone explain estimated taxes in retirement?

[TrvlBug]

As long as your minimums - last year's taxes (times 110% if applicable), or 90% of current year's taxes - are covered by the withholding from the RMD, it doesn't matter where your income is coming from.

Thanks audreyh. Will look into what my State allows and if not the same will simply pay the entire State amount in April and the Federal with the November RMD. As my State taxes are ~25% of Federal, this works well for us.

 

[LXEX55]

Just to clarify....

Thank you all for your kind thoughtful responses. But, just to clarify, if I have federal tax withheld from my SS, pension, 401k withdrawals, and any money I may get in the event I purchase a fixed annuity with my 401k money, I only have to pay at the end of the year....correctomundo?
I will ask my tax guy what % I should have withheld from the above income.

 

[kgtest]

Why wait for stuff to show up in the mail? If you think about it, almost everything can be estimated very closely before the end of the year. Get all of those estimates in there and then twiddle the tIRA withdrawals and/or Roth conversions until you get where you want. Set the withholding for state and federal, do your pulls, then put it all away until February or April or whenever, when you key the actual values and submit.

Exactly what I do. Twiddle with the Roth conversion after updating state/fed withholding 2x a year. I come into the year a bit heavy on the withholding, then back-off in Q2 and Q3 and increase as much as needed on top of a final Roth conversion. Works out well, a lot of twiddling but its basically a necessary evil.



Next year I might rethink as I plan to front-load my 401k contributions. I'll probably go real light on withholding, then after 401k contributions max out end of Q1 I will crank up the withholding the rest of the year essentially smoothing out my liquidity while making sure taxes are covered.

 

[CardsFan]

You have to do your taxes sooner or later. Why wait for stuff to show up in the mail? If you think about it, almost everything can be estimated very closely before the end of the year. Get all of those estimates in there and then twiddle the tIRA withdrawals and/or Roth conversions until you get where you want. Set the withholding for state and federal, do your pulls, then put it all away until February or April or whenever, when you key the actual values and submit.

This is what I have done for the first two years of retirement, and maybe this year as well, as I have not paid any quarterly's to date. Only down side is that it reduces the amount of tIra I can convert to Roth, and still stay in the 12% bracket.

So, a question: If I make a quarterly payment at the same time I do my conversion, will that allow me to avoid any penalties/interest? I think I read in a past thread that there may need to be an explanation provided to the IRS. Does Turbotax guide you through this?

In any event, I have set up an EFTPS account and will probably pay quarterly's next year.

 

[gauss]

Thank you all for your kind thoughtful responses. But, just to clarify, if I have federal tax withheld from my SS, pension, 401k withdrawals, and any money I may get in the event I purchase a fixed annuity with my 401k money, I only have to pay at the end of the year....correctomundo?
I will ask my tax guy what % I should have withheld from the above income.

If the amount that is due at the end of the year is less than $1000 (or you are getting a refund) then you are correct -- no penalty.

If you still owe more than $1000 when you file your tax return then you may be subject to a penalty.

 

[rayvt]

It has been said a few times already.
Your withholding for the year needs to meet the safe-harbor amount to avoid the penalty. The IRS doesn't care about the timings of the withholdings, just the total amount-- Dec 31 is as good as Jan 1 to them.

The simplest thing to do is one large withholding late in the year, by withdrawing the necessary amount from an IRA or 401K and have them withhold 100% of it.

Or you can fiddle with quarterly estimated payments, withholds from SS, pensions, periodic IRA withdrawals, etc. But a single large withhold is easier. No fiddling around, no multiple deadline, just one deadline and one easy to compute amount.

 

[pb4uski]

Late to the thread.

I don't make quarterly estimated tax payments. I use the annual income installment method, and since our tax would be nil absent Roth conversions that I do in December, I calculate our estimated taxes in late December and make an estimated payment by January 15th of the year following the tax year.

As a result I fill our Form 2210, Schedule AI.... which is a bit of a PITA but not too bad.

I would consider just doing a withdrawal and have 100% withheld to avoid the penalty, but the amount withheld would reduce my Roth conversions for the year and I'm looking to maximize Roth conversions.