Higher than expected taxes, what to do

[explanade]

So I didn't pay enough attention and will have much more income in TY2023 than I've reported in all my years of being FIREd. Combination of doing too much traditional to ROTH 401k conversion and selling stock late in the year, with bigger gain than anticipated.

I've been putting excess cash into CDs so I don't have a lot of cash on hand.

My options seem to be:

1) Sell some stock, but that would again raise my taxable income in TY24.

2) Early withdrawal of a brokerage CD, which I'm not sure how it works but appears you have to possibly lose not only accrued interest but some principal.

3) Make partial payments to the IRS and the CA FTB, understanding that there will be fines and interest to pay.


I don't know enough about 2) or 3) yet but the CD if left to mature would return about $2300-2600 in interest ($51k principal).

Maybe the IRS penalty and interest would be nowhere near $2500 in interest on the CD plus whatever loss of principal?

 

[pb4uski]

There is no early withdrawal on a brokerage CD. You just sell the CD in the current market. They are often thinly traded but it is worth seeing what you might get. Even if you end up selling at a loss, the loss may be less than what an early withdrawal penalty would be on a bank CD. And you do get accrued interest. Below is from a sale of a brokered CD last October.

Action

Sell

Quantity

xx,000

Price

$98.90

Principal

$xx,xxx.00

Commission

$0.00

Accrued Interest

$185.84

Total

$xx,xxx.xx

 

[audreyh1]

You won’t lose accrued interest as that will be paid to you by the buyer. You may lose some principal.

 

[explanade]

How do you know the price you will get?

Fidelity says you pay $1 commission per $1000 of principal? if you sell before maturity.

The partially-accrued interest would be paid at the normal maturity date?

 

[Surewhitey]

I'd sell a little stock. How much are you talking? $2k or $50k? Would you have a huge or smaller amount of cap gains?

 

[explanade]

I'd sell a little stock. How much are you talking? $2k or $50k? Would you have a huge or smaller amount of cap gains?

About $20-30k.

Plus estimated taxes, which would probably be $5k for both federal and state.



I checked Fidelity's process. Looks like you request a bid on the CD you want to sell early.

Obviously the incentive of potential buyers would be to get themselves a discount of a few percentage points from the full principal value, so I would guess that any offers would try to shave a couple of thousand at least.

 

[HarveyS]

What about taking a Pledged Asset Loan from your brokerage? See the "what am i missing" thread.

 

[jazz4cash]

I like the pledged asset loan suggestion.

 

[Surewhitey]

I'd keep it simple and take a (possible) small hit on the CD, personally. You probably aren't going to incur much, but YMMV.

Unless you can pull it out of your Roth acct...

 

[pletal]

I like the pledged asset loan suggestion.

I do that almost every year . For part of my taxes. Started a savings account this year for 24 taxes

 

[pb4uski]

How do you know the price you will get?

Fidelity says you pay $1 commission per $1000 of principal? if you sell before maturity.

The partially-accrued interest would be paid at the normal maturity date?

You'll get a bid when you go to sell and it will tell you the exact amount that you'll receive. If you don't like it then cancel.

The buyer pays you accrued interest from the last interest payment date (or issuance) to when you sell. The buyer then gets reimbursed for that when the issuer pays the interest so the buyers net interest is for the time that they have held the CD.

 

[pb4uski]

... Obviously the incentive of potential buyers would be to get themselves a discount of a few percentage points from the full principal value, so I would guess that any offers would try to shave a couple of thousand at least.

Not near that much. The offers will be based on the going rate for brokered CDs with a remaining maturity similar to yours. The market value of the brokered CD should show in your dashboard. You can expect something close it that plus accrued interest.

 

[audreyh1]

What about taking a Pledged Asset Loan from your brokerage? See the "what am i missing" thread.

I like the pledged asset loan suggestion.

Interesting option. Fidelity even mentions paying taxes as a use: https://www.fidelity.com/lending/securities-backed-line-of-credit

 

[Gumby]

HELOC? Loan on cash value of life insurance? Balance transfer deal on a credit card? Any one of these probably would be lower interest than the rate charged by the IRS for late payments, which is 8% APR.

 

[Closet_Gamer]

On the stock front, you could probably prowl through your positions for specific lots don't have big gains on them. Again, depends on how much money you're trying to raise but if you sell specific lots on specific positions that are near what you paid, you wont' generate a big taxable gain.

Maybe you even have some specific lots that are underwater?

Just watch out for wash sale situations.

 

[Chuckanut]

I'd keep it simple and take a (possible) small hit on the CD, personally. You probably aren't going to incur much, but YMMV.

Unless you can pull it out of your Roth acct...

If you sell stock make sure the proceeds don’t make you fall into the IRMAA trap, if that applies to you.

 

[explanade]

You'll get a bid when you go to sell and it will tell you the exact amount that you'll receive. If you don't like it then cancel.

The buyer pays you accrued interest from the last interest payment date (or issuance) to when you sell. The buyer then gets reimbursed for that when the issuer pays the interest so the buyers net interest is for the time that they have held the CD.

Dashboard shows a market value which is like $12 less than the interest, just under 3 months from maturity.

So the buyer would get about 3 months of interest and I'd get the rest?

 

[pb4uski]

Yes. Say it is a $100,000 one-year CD with a 5% interest rate and 3 months left. When you sell, your sale proceeds would include $3,750 of accrued interest that they buyer pays to you. Then 3 months later the buyer received $5,000 in interest from the issuer, so net they receive $1,250... for the 3 months that they owned the CD.

If you only have 3 months to maturity then I would expect that the pricing would be close to par ($100)... perhaps a little less. I have a 5.6% brokered CD maturing in August that I could sell for $99.62 less commission of $0 plus accrued interest.

The dashboard values are often higher than what you can sell for, at least on Schwab. You can see the more realistic selling price if you start the process to sell the CD.

 

[explanade]

Yes. Say it is a $100,000 one-year CD with a 5% interest rate and 3 months left. When you sell, your sale proceeds would include $3,750 of accrued interest that they buyer pays to you. Then 3 months later the buyer received $5,000 in interest from the issuer, so net they receive $1,250... for the 3 months that they owned the CD.

If you only have 3 months to maturity then I would expect that the pricing would be close to par ($100)... perhaps a little less. I have a 5.6% brokered CD maturing in August that I could sell for $99.62 less commission of $0 plus accrued interest.

The dashboard values are often higher than what you can sell for, at least on Schwab. You can see the more realistic selling price if you start the process to sell the CD.

Yeah the one I'm looking at matures around mid June, so about 3 months from now and it's $99.977, which would equal about $12 less than the original principal.

I'd be ecstatic to get that.

But I think Fidelity will impose a $1 a CD (per $1000) fee for selling early.

Still would be okay than maybe the other options.

But I was looking at my portfolio and there is some tax-loss harvesting I could do, not to raise the full amount that I'd need but could cover about half or more.

 

[explanade]

Accepted a bid, will be about $126 haircut plus almost 3 remaining months of interest.

But I looked at IRS penalties and interest for paying late and it should be much less, maybe 1/4 or 1/3.

Not only taxes due for 2023 but the estimated taxes I'd have to remit also in April, June, etc.

 

[TheWizard]

For future reference, consider maintaining a larger target checking account balance to handle lumpy expenses. Eleven years into retirement, I don't call mine an emergency fund anymore.
I target $10k in checking which has proven sufficient to cover mostly lumpy travel expenses. But it easily covers additional Roth conversion taxes as well...

 

[Koolau]

For future reference, consider maintaining a larger target checking account balance to handle lumpy expenses. Eleven years into retirement, I don't call mine an emergency fund anymore.
I target $10k in checking which has proven sufficient to cover mostly lumpy travel expenses. But it easily covers additional Roth conversion taxes as well...

I have two checking accounts - each of which I keep at $10K or more for lumpy expenses. I never want to be without cash at my finger tips but YMMV.

 

[RetiredHappy]

I keep $100K in my checking account to take care of lumpy expenses. We have too many of those.

 

[pc95]

So I didn't pay enough attention and will have much more income in TY2023 than I've reported in all my years of being FIREd. Combination of doing too much traditional to ROTH 401k conversion and selling stock late in the year, with bigger gain than anticipated.

I've been putting excess cash into CDs so I don't have a lot of cash on hand.

My options seem to be:

1) Sell some stock, but that would again raise my taxable income in TY24.

2) Early withdrawal of a brokerage CD, which I'm not sure how it works but appears you have to possibly lose not only accrued interest but some principal.

3) Make partial payments to the IRS and the CA FTB, understanding that there will be fines and interest to pay.


I don't know enough about 2) or 3) yet but the CD if left to mature would return about $2300-2600 in interest ($51k principal).

Maybe the IRS penalty and interest would be nowhere near $2500 in interest on the CD plus whatever loss of principal?

You can never escape taxes - duty to pay - take you lumps now - I would pay it all off and pay more taxes if you need to pay it all. Your post gives me an idea that I thought about but should do. - have the brokerage take out federal on any distribution/dividend. Shoot for even but overpay ok, but not underpay as you know/see..

 

[Al18]

Why keep your spare change in a checking account paying nothing? Discover Savings is paying 4.25% per year and Capital One 360 Savings is paying 4.35%.