dealing with taxes on nestegg withdrawals?

[albireo13]

I was just curious how folks like to manage taxes on tax-deferred fund withdrawals. Do you create witholdings and pay estimated taxes quarterly?
Just wait until end of year and pay a wopping chunk to IRS at tax time?
Can witholdings be set up automatically to be sent to IRS for withdrawals?

Most of our nestegg savings are tax deferred ... 401K, 403B, IRA. I am recently retired and we haven't yet touched savings but, envision doing so in the near future. I will have to figure out how best to reconcile the taxes.

 

[aja8888]

I file quarterly as required as I pull out money periodically from my IRA as an annual RMD.

I use this to set up quarterly payments:

https://www.irs.gov/payments/eftps-the-electronic-federal-tax-payment-system

 

[RunningBum]

Withholdings are best, because the IRS views them as being done throughout the year, so you don't hit any underpayment penalty for taking income early and paying taxes much later in the year.

That doesn't work for conversions if you are under 59.5 though, since that's considered an early withdrawal. Another strike against using them for conversions is that ideally you would convert the entire amount and pay the tax from a taxable account, to maximize the conversion benefit.

EFTPS can be used to pay quarterly estimated taxes. Either do them evenly, or pay as you go for the quarter just passed. You might have to fill out form 2210 for the latter to show when the income came.

Sending a big check at the end will almost certainly result in an underpayment penalty.

 

[W2R]

I use EFTPS to pay my quarterly estimated taxes. I pay the same amount each quarter. I like EFTPS because I can schedule the desired amount to be paid directly out of my checking account, on whatever day or days I wish during the year, for all four quarterly payments. Then I don't have to think about it for the rest of the year. All I have to do is keep enough $$$ in checking to cover it.

Audreyh1 is the forum member who explained to me how to do this. I think it's one of the best tips I have gotten from the ER Forum.

 

[OldShooter]

I calculate our safe harbor amount, 110% of last year's taxes -- both federal and state. In early December I then withdraw that amount from the IRAs with 100% withholding.*

Never a reason to estimate anything unless the safe harbor amount makes you unhappy. No reason to pay them prior to December if you can pay it as withholding from an IRA.

*Actually slightly less than 100% because Schwab won't do 100.0%. But close enough.

 

[Alan]

I use EFTPS to pay my quarterly estimated taxes. I pay the same amount each quarter, since I withdraw and spend about the same amount too. I like EFTPS because I can schedule the desired amount to be paid directly out of my checking account, on whatever day or days I wish during the year, for all four quarterly payments. Then I don't have to think about it for the rest of the year. All I have to do is keep enough $$$ in checking to cover it.

.

I also do this.

EFTPS sends an email reminder 2 or 3 days prior to each scheduled withdrawal so if I forget I can either move money to the checking account or go onto EFTPS and reschedule the payment.

 

[jimbee]

I calculate my safe harbor amount and have withholding done in December when I rebalance my investments.

 

[Dash man]

We also use EFTPS and I’ve already set up four equal quarterly payments for our anticipated income for this year. We won’t use the safe harbor for this year because our income will be much less. If things change, we can adjust and pay more later. We’ll have to wait to see if any tax law changes may come our way.

 

[Jerry1]

I calculate my safe harbor amount and have withholding done in December when I rebalance my investments.

That’s what I’m doing from now on. My first few years in retirement I tried to match it with my income/withdraws, but this year I realized that there was no need to do this. I have a pension where I have withholding, but I’m even going to stop that and just use safe harbor at year end through a withholding. No muss no fuss. Pay the difference at tax time and be done with it.

 

[OldShooter]

... I have a pension where I have withholding, but I’m even going to stop that and just use safe harbor at year end through a withholding. ...

Yup. We don't elect withholding on anything.

 

[Markola]

We are having TSP and Fidelity withhold taxes on each month’s withdrawals. In fact, I think withholding was required on the notarized forms setting up the withdrawal schedule.

 

[TheWizard]

OP asks about nest egg withdrawals, from tax deferred accounts.
I do monthly withdrawals in addition to having monthly pension/annuity income. So I set up withholding from those sources at the start of retirement.

When I started age 70 SS last year, I set up maximal withholding on that, since it was on top of a decent income to start with.

I do something different with my Roth conversion amounts, but that's off topic from the OP's question.

When I start RMDs in 2022, I'll do those monthly as well and will try to set withholding to get me around $500 under my total tax liability at year's end.
Might take a couple years to get it tuned properly...

 

[bada bing]

Do any of you using withholding from an end-of-year withdrawal have any issue with not max'ing Roth conversions ? I envision that I'll be doing withdrawals only for conversion for the next 8 years before RMDs kick in, and have enough in after-tax savings to pay the taxes due. Doesn't using funds from the withdrawal for tax withholding result in lower amounts transferred to Roth for the same amount/tax of liability ? Is there a "trick" to get the benefit of late year withholding and still get the maximum conversion efficiency ?

 

[Jerry1]

Maxing out a ROTH conversion implies that you’re trying to hit the max of a particular tax bracket. In that case, yes, it would dilute your conversion or force you into the next bracket. In my case, I’m only trying to max out the 12% bracket and the amount left after my other income isn’t that great so it’s not really an issue for me.

I think there’s a way to put more money in your ROTH, but I don’t think there’s any way to get out of going into the next bracket.

 

[pb4uski]

I've settled in on a new approach for me for 2021. I did ~90% of my Roth conversion for the year in early January and will top it up to the top of the 12% tax bracket in December. Since I Roth convert to the top of the 12% bracket, I have a pretty good idea what my taxes for the year will be since I know what my total ordinary income will be but just not the individual pieces (interest, Roth conversions, SS, etc.). I adjusted the withholdings on my pension to take out enough so I'll only owe a little with next year's return rather than have to write out a big check next year.

With how puny cash returns are these days I'm not very concerned about lost interest on the float.

 

[TheWizard]

Regarding Roth conversions, I have a $1500/month ongoing conversion that I set up 6 years ago.
Then every year after Thanksgiving, I estimate what my AGI for the year will be and set up an additional lump conversion based on that.

I'm in the 24% Federal tax bracket and well into the Medicare IRMAA tiers. So I target my total AGI to be just under the next higher IRMAA threshold.

When I start RMDs next January, my AGI for 2022 should be close to the same level without doing any Roth conversions for that year...

 

[teejayevans]

Regarding safe harbor rule, just to be clear:

So if I paid $1000 in taxes in the previous year and through withholding I send IRS $1100 but owe $100,000 in taxes...there is no penalty or interest?
There is no fine print about absolute amounts or how the income was earned (IRA vs W2...)?

 

[Alan]

I think the rule changes slightly for high income individuals. (Bold is my highlight)

https://www.hrblock.com/tax-center/...IRS will not charge,for the previous tax year.

Generally, an underpayment penalty can be avoided if you use the safe harbor rule for payments described below. The IRS will not charge an underpayment penalty if you pay at least:

90% of the tax you owe for the current year, or
100% of the tax you owed for the previous tax year.

This rule is altered slightly for high-income taxpayers. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

However, if you do not pay at least that much via quarterly estimated payments, you may be subject to an underpayment penalty.

 

[RunningBum]

Do any of you using withholding from an end-of-year withdrawal have any issue with not max'ing Roth conversions ? I envision that I'll be doing withdrawals only for conversion for the next 8 years before RMDs kick in, and have enough in after-tax savings to pay the taxes due. Doesn't using funds from the withdrawal for tax withholding result in lower amounts transferred to Roth for the same amount/tax of liability ? Is there a "trick" to get the benefit of late year withholding and still get the maximum conversion efficiency ?

The best you can do is to convert early in the year, and make even quarterly estimated payments, unless you have another source you can withhold from, like a pension.

 

[RunningBum]

Regarding safe harbor rule, just to be clear:

So if I paid $1000 in taxes in the previous year and through withholding I send IRS $1100 but owe $100,000 in taxes...there is no penalty or interest?
There is no fine print about absolute amounts or how the income was earned (IRA vs W2...)?

So you've paid the required 110% and should be fine. I think when I've had a lot higher income in a couple of exception years I chickened out and increased my estimated tax payment in the quarter I had the income, but I should have been fine without doing it.

 

[donheff]

I currently set withholding in my pension to cover all of our income (my IRA and TSP, dividends and CGs from taxable, DW's SS and pension). When DW starts RMDs in a few years most of her withdrawals will go back into savings. At that point I will probably drop the pension withholding and do the whole shebang in the fall through 401K withholding as others mentioned.

 

[CRLLS]

We have automatic withholding monthly on SS and on a small annuitized insurance policy. Also if/when I withdraw from our tIRA for other annual expenses. That covers the taxable portion of our expenses. When we make a Roth Conversion, we calculate the additional taxes required and make 2 tIRA withdrawals, the first is the conversion amount (100% converted) the 2nd is the tax amount where 100% is withheld. It always seems to work out where we get a couple dollars back when we file taxes. When I was self employed and paid taxes quarterly I was caught with a late payment once or twice. The late payment was not a big dollar amount 10-20 dollars IIRC.

 

[racy]

Our tIRAs are at Vanguard. We take an automatic monthly withdrawal. Vanguard offers an option to withhold any amount of federal and state taxes one chooses, which is what we do.

 

[Out_the_Door]

I've only been retired for 14 months but I waited until to December to have taxes withheld from my IRA distribution. I got back a $74 refund so I was pretty close in my calculations. I'm currently under a 10% effective tax rate.

 

[albireo13]

OP here.
I have had my 401K moved into my IRA. My plan is to start pulling from my IRA funds at Fidelity very soon now.

A few more questions ...

I plan to do some lumpy withdrawals. Can Fidelity do tax witholdings for me or, do I have to pay them myself to the IRS?

Also, can I make estimated tax payments anytime during the year or, do they have to be on a quarterly basis?

Thx.