Do we need to make quarterly tax payments?

[quiltingemi]

My husband retired a couple of years ago and last year he received the last distribution of his stock options. We live on investments and savings. We are planning on converting our traditional IRAs to Roth IRAs in to stay in the 22-24% tax bracket. Are we supposed to make quarterly payments to the IRS since we have no other tax withholding?

 

[RetireBy90]

Short answer is yes. If you just pay when filing tax return you will get hit with a penalty and interest expense on top of the tax due.

 

[OldShooter]

Longer answer is maybe not. If you can pay in December by withdrawing from your IRAs and specifying 100% withholding to cover both state and federal, then you can forget about the quarterly payments because the withholding is considered to have been paid during the year. The amount to pay is either 100% or 110% (depends on your income) of your prior year tax liability aka the "safe harbor" amount. Or you can estimate the current year's liability and pay that. I am too lazy to do any calculations so we just pay the safe harbor amounts in December.

This works with our state income tax, too, but I have no way to know if it works in every state.

 

[Car-Guy]

Longer answer is maybe not. If you can pay in December by withdrawing from your IRAs and specifying 100% withholding to cover both state and federal, then you can forget about the quarterly payments because the withholding is considered to have been paid during the year.

Been doing this for years.... It works....

 

[RetireBy90]

Longer answer is maybe not. If you can pay in December by withdrawing from your IRAs and specifying 100% withholding to cover both state and federal, then you can forget about the quarterly payments because the withholding is considered to have been paid during the year. The amount to pay is either 100% or 110% (depends on your income) of your prior year tax liability aka the "safe harbor" amount. Or you can estimate the current year's liability and pay that. I am too lazy to do any calculations so we just pay the safe harbor amounts in December.

This works with our state income tax, too, but I have no way to know if it works in every state.

I did both last year, my first year fully retired. I have the funds in taxable accounts to pay the taxes so I paid what I expected in quarterly installments and then what I had missed in Dec with the IRA withdrawal at 70% federal withholding and 25% state. Plan this year to do the same but hope the December withdrawal is small this year.

 

[quiltingemi]

Thank you for your explanation! I’m new to this and I’m trying to understand the process.
When you say specifying 100% withholding, where or to whom I specify? To the investment company or the IRS when I fill out the form and mail the check?

Longer answer is maybe not. If you can pay in December by withdrawing from your IRAs and specifying 100% withholding to cover both state and federal, then you can forget about the quarterly payments because the withholding is considered to have been paid during the year. The amount to pay is either 100% or 110% (depends on your income) of your prior year tax liability aka the "safe harbor" amount. Or you can estimate the current year's liability and pay that. I am too lazy to do any calculations so we just pay the safe harbor amounts in December.

This works with our state income tax, too, but I have no way to know if it works in every state.

 

[RunningBum]

Thank you for your explanation! I’m new to this and I’m trying to understand the process.
When you say specifying 100% withholding, where or to whom I specify? To the investment company or the IRS when I fill out the form and mail the check?

The investment company. OldShooter is saying that you can make an extra withdrawal at the end of the year but instead of taking it as a cash withdrawal, you put the whole thing as tax withholding. Withholding is treated as if it was made throughout the year, so you won't face any underpayment penalty for waiting until the end of the year to pay taxes.

A few things to keep in mind:
- Don't do this if you aren't 59.5, because you'll incur a penalty for early withdrawal.
- This end of year withdrawal adds additional income. You may not want this, especially if you are limiting income for an ACA subsidy or trying to avoid IRMAA.

I just keep it simple and make quarterly estimated payments up to my safe harbor amount.

 

[audreyh1]

Thank you for your explanation! I’m new to this and I’m trying to understand the process.
When you say specifying 100% withholding, where or to whom I specify? To the investment company or the IRS when I fill out the form and mail the check?

I don’t think I would use this method for Roth conversions. Simpler to rollover the entire amount and not lose some to withholding.

It’s fine if you are withdrawing from your IRA for income or to meet RMD requirements.

 

[target2019]

My husband retired a couple of years ago and last year he received the last distribution of his stock options. We live on investments and savings. We are planning on converting our traditional IRAs to Roth IRAs in to stay in the 22-24% tax bracket. Are we supposed to make quarterly payments to the IRS since we have no other tax withholding?

Thank you for your explanation! I’m new to this and I’m trying to understand the process.
When you say specifying 100% withholding, where or to whom I specify? To the investment company or the IRS when I fill out the form and mail the check?

I try to keep tax processes as simple as possible. I start with last year's taxes and look at the effect of Roth contributions, and what I should take to stay in the 22% tax bracket (joint). (Actually, for us it will be 12% tax bracket.)

The tax software should have a form or two that helps you estimate taxes for this year. It will also let you know if you should pay estimated taxes depending on the method you choose.

What does your tax preparer say about the issue? They should be able to quickly generate forms for 2021 estimated payments using the conversion amount you desire.

Whether you make 4 payments or one large one depends on your cash flow. And ideally the tax paid would come from a taxable account.

 

[JoeWras]

A few things to keep in mind:
- Don't do this if you aren't 59.5, because you'll incur a penalty for early withdrawal.
- This end of year withdrawal adds additional income. You may not want this, especially if you are limiting income for an ACA subsidy or trying to avoid IRMAA.

I just keep it simple and make quarterly estimated payments up to my safe harbor amount.

Agree with RunningBum and I'm emphasizing bum's first important point in case the OP falls into this age range.

Quarterly payments are not as difficult as they sound. Some tax issues I'd work to avoid at all costs, but quarterly payments are not one of them. And if you sign up for EFTPS, it is even easier.

 

[Surewhitey]

I followed this advice for the first time this year and e-file went through without a problem. Even got a good chunk back as I wasn't sure of the consequence of the maximum SEP 401K.

We just took an additional $2k/pay period from DW's paycheck in Nov and Dec for cushion & continued through February of this year for next year's returns. I like simple...

We're in the 24% bracket... Planning to be in the 12% in RE.

 

[RetireBy90]

while the "experts" are on the line here, any ideas or comments on TT quarterly tax coupons, esp the amounts ? Wondering where they come up with that number.

Thanks

 

[Car-Guy]

while the "experts" are on the line here, any ideas or comments on TT quarterly tax coupons, esp the amounts ? Wondering where they come up with that number.

Thanks

I'm not a tax expert but this may help answer your question.

https://turbotax.intuit.com/tax-tip...w-to-determine-what-to-pay-and-when/L3OPIbJNw

 

[FANOFJESUS]

With the Federal and State are you covered if you just pay them what you paid them last year?

 

[OldShooter]

With the Federal and State are you covered if you just pay them what you paid them last year?

There is an income threshold below which that is the safe harbor amount. Above the threshold you have to pay 110%. (Someone will be along shortly to give us the threshold number. I don't remember.)

(That is definitely true for the Feds. You'll have to check your state rules to be sure it works for them.)

 

[audreyh1]

$150K AGI for married filing jointly.

 

[OldShooter]

Thank you for your explanation! I’m new to this and I’m trying to understand the process.
When you say specifying 100% withholding, where or to whom I specify? To the investment company or the IRS when I fill out the form and mail the check?

@quiltingemi, I think you have your answers. Some of the posts, though, make this seem more complex an issue than it really is.

It is simply a method of avoiding underpayment penalties while paying as late as possible in the year. It has nothing to do with Roth conversions or anything else you might be doing and nothing to do with your income during the year. Yes, it does increase your taxable income by the amount of the IRA withdrawal. Yes, if you are trying to manage withdrawals to hit marginal tax rate targets, specific income levels, or RMDs, this withdrawal has to be considered just like any other withdrawal in the mix.

Our case is very simple. My only constraint is the RMDs. So in early December I pay the safe harbor tax amount. Once that is done, I can compare our total withdrawals to the RMDs and make additional draws as necessary. But since our payment is the safe harbor amount and not based on our income during the year, no calculations or estimates need to be done as a result of those last draws.