IRA withdrawal and taxes

[MrFlish]

I'm going to be eligible (59 1/2) to begin withdrawing funds from my IRA in 2019. My question regards the tax payment process options I should consider. Given I've never done this before I'm a bit concerned how to proceed.

Thanks in advance for the assistance...

 

[TwoByFour]

You probably have an option for tax withholding to be automatically subtracted from money taken out of your IRA (Schwab does). You will get a 1099 form from your brokerage house that will have your withdrawals and the tax withholding for the year. The withdrawal counts as ordinary income. So just file your taxes using the data on the 1099. I set my withholding to be close to my effective tax rate, about 10%.

Alternatively, you don't have to have taxes withheld from IRA withdrawals, but then you might need to make prepayments directly to the IRS.

 

[MrFlish]

You probably have an option for tax withholding to be automatically subtracted from money taken out of your IRA (Schwab does). You will get a 1099 form from your brokerage house that will have your withdrawals and the tax withholding for the year. The withdrawal counts as ordinary income. So just file your taxes using the data on the 1099. I set my withholding to be close to my effective tax rate, about 10%.

Alternatively, you don't have to have taxes withheld from IRA withdrawals, but then you might need to make prepayments directly to the IRS.

Perfect, it sounds pretty simple and straight forward. It looks like Vanguard has the process you described above. That will work perfectly as we've got two projects we'll use the IRA to fund in 2019 and I can pull the money when we need it rather than pulling it all at once.

 

[jazz4cash]

It depends on where you have IRA and if you need state withholding. In my case Fido will withhold whatever % or dollar amount I choose for state and Federal. My credit union will only do Federal withholding. Our state has pretty simple process for estimated payments or I could use Fido to withhold state taxes

 

[OldShooter]

... My question regards the tax payment process options I should consider. Given I've never done this before I'm a bit concerned how to proceed. ...

Here is a very simple option:

1) At the end of the year make sure you have paid the "safe harbor" amount of taxes. For Feds this is either 100% or 110% of last year's taxes. This is easy to calculate and no worries about estimating anything. Your state almost certainly has something similar.

2) If you are short of the safe harbor amount going into December, make a withdrawal from your IRA and have the needed amounts withheld for the feds and the state. The trick here is that withholding is considered paid during the year regardless of when it is actually paid, so there is no need to fool around with quarterly payments or having money withheld from other IRA withdrawals.

 

[MrFlish]

Here is a very simple option:

1) At the end of the year make sure you have paid the "safe harbor" amount of taxes. For Feds this is either 100% or 110% of last year's taxes. This is easy to calculate and no worries about estimating anything. Your state almost certainly has something similar.

2) If you are short of the safe harbor amount going into December, make a withdrawal from your IRA and have the needed amounts withheld for the feds and the state. The trick here is that withholding is considered paid during the year regardless of when it is actually paid, so there is no need to fool around with quarterly payments or having money withheld from other IRA withdrawals.

Interesting...that saves me from having to estimate/paying taxes for withdrawals thru out the year. Come December, I just withdraw the amount needed for a safe harbor and I'm good to go.

Am I reading you correctly?

 

[pb4uski]

Even easier.... do a YTD tax calculation in mid December of how much you will owe for the year... then do a IRA withdrawal with withholding equal to the amount of the tax... it is just like an estimated tax payment but because it is done as an IRA withdrawal withholding the IRS views it as paid across the year withdrawn.

ETA: See clarification in post #9

 

[audreyh1]

Even easier.... do a YTD tax calculation in mid December of how much you will owe for the year... then do a IRA withdrawal with withholding equal to the amount of the tax... it is just like an estimated tax payment but because it is done as an IRA withdrawal withholding the IRS views it as paid across the year withdrawn.

But that also increases your income and thus taxes for the year right? unless you've already figured out that it is part of your RMD.

 

[pb4uski]

I figure it in.... my withdrawal is what I need to bring our estimated taxable income to the top of the 0% LTCG bracket ($77,200 in 2019 for MFJ).. then I figure the federal and state tax and build those amounts into the withholdings.

Probably should have been clearer in the earlier post.

 

[target2019]

Here is a very simple option:

1) At the end of the year make sure you have paid the "safe harbor" amount of taxes. For Feds this is either 100% or 110% of last year's taxes. This is easy to calculate and no worries about estimating anything. Your state almost certainly has something similar.

2) If you are short of the safe harbor amount going into December, make a withdrawal from your IRA and have the needed amounts withheld for the feds and the state. The trick here is that withholding is considered paid during the year regardless of when it is actually paid, so there is no need to fool around with quarterly payments or having money withheld from other IRA withdrawals.

Interesting...that saves me from having to estimate/paying taxes for withdrawals thru out the year. Come December, I just withdraw the amount needed for a safe harbor and I'm good to go.

Am I reading you correctly?

Using the method quoted means you would not owe a penalty, but you would PAY additional tax on IRA withdrawal by tax day of the following year.

I think the simplest method is tell your institution what % tax to deduct for FED and STATE. You do have to know your tax bracket for FED and STATE, and determine if the IRA withdrawal POSSIBLY bumps you up to the next BRACKET.

 

[MrFlish]

Using the method quoted means you would not owe a penalty, but you would PAY additional tax on IRA withdrawal by tax day of the following year.

I'm not sure I follow what you mean...

 

[kaneohe]

I'm not sure I follow what you mean...

If you withdraw from TIRA just to pay your expenses but don't withhold anything at that time, then when you make yr end withdrawal for taxes (which is an expense), you also need to figure in the tax on that withdrawal.

 

[audreyh1]

If you withdraw from TIRA just to pay your expenses but don't withhold anything at that time, then when you make yr end withdrawal for taxes (which is an expense), you also need to figure in the tax on that withdrawal.

Yes, this is what is confusing about some of the above responses. Unless you want to incur additional income and taxes, you need to figure out what taxes you owe, and withhold the correct amount on your already planned IRA withdrawals.

 

[target2019]

I'm not sure I follow what you mean...

See post #2 in this thread. I agree with the recommendation and it is what I would do.

 

[OldShooter]

Interesting...that saves me from having to estimate/paying taxes for withdrawals thru out the year. Come December, I just withdraw the amount needed for a safe harbor and I'm good to go.

Am I reading you correctly?

Yup. That is exactly what we do, but our finances are very simple. We have long since spent or Roth-converted our taxable investments, so all our income is from TIRAs.

For anyone, the safe harbor option works. I rarely disagree with @pb4uski but I do in this case. Unless someone's income varies widely from year to year, I see no reason to screw around trying to estimate the current year's taxes. Even with variation, the only risk with using the safe harbor is maybe overpaying a little bit and tying up the overpayment at zero interest for two or three months. I am lazy; I am willing to take this risk.

Where you have a mix of income, it becomes slightly more complex. If paying the withholding from your IRA funds causes you to withdraw more than you wanted then, yes, you will have to pay on that withdrawal. That is what some of the posters are trying to point out. As a fallback, you may end up making some quarterly payments until the required year-end withholding suits your IRA payout strategy. But again, using the safe harbor strategy there is still no need to estimate anythnig. Worst case, you just write four estimated tax checks to the feds and to your state, each of which is 1/4 of the safe harbor amount.

The number of posters here who seem determined to estimate the current year's taxes amazes me. I must not have the tax-estimation-enthusiasm gene.

 

[Sunset]

....

The number of posters here who seem determined to estimate the current year's taxes amazes me. I must not have the tax-estimation-enthusiasm gene.

I used to try to estimate the taxes, but due to a number of DW's mutual funds, we would get a surprise of declared income in JAN -> FEB after the year is over (you don't actually get the income) but it's taxable. This would happen every now and then randomly.

This would push us over the estimated taxes and we had to pay penalties. Our State is very $$ hungry so any chance to instill a penalty they will take up to $250.

Now we are doing the 110% of last year.

 

[audreyh1]

For anyone, the safe harbor option works. I rarely disagree with @pb4uski but I do in this case. Unless someone's income varies widely from year to year, I see no reason to screw around trying to estimate the current year's taxes. Even with variation, the only risk with using the safe harbor is maybe overpaying a little bit and tying up the overpayment at zero interest for two or three months. I am lazy; I am willing to take this risk.

Where you have a mix of income, it becomes slightly more complex. If paying the withholding from your IRA funds causes you to withdraw more than you wanted then, yes, you will have to pay on that withdrawal. That is what some of the posters are trying to point out. As a fallback, you may end up making some quarterly payments until the required year-end withholding suits your IRA payout strategy. But again, using the safe harbor strategy there is still no need to estimate anythnig. Worst case, you just write four estimated tax checks to the feds and to your state, each of which is 1/4 of the safe harbor amount.

The number of posters here who seem determined to estimate the current year's taxes amazes me. I must not have the tax-estimation-enthusiasm gene.

Our income and taxes owed does occasionally vary widely year to year, so we do have to occasionally use the Annualized Income method for paying estimated taxes, otherwise we would WAY overpay taxes some years and I don’t want to build up a large refund.

We also are not yet withdrawing from IRAs or anything that has a tax withholding option. So we have to pay estimated taxes.

 

[pb4uski]

Yup. That is exactly what we do, but our finances are very simple. We have long since spent or Roth-converted our taxable investments, so all our income is from TIRAs.

For anyone, the safe harbor option works. I rarely disagree with @pb4uski but I do in this case. Unless someone's income varies widely from year to year, I see no reason to screw around trying to estimate the current year's taxes. Even with variation, the only risk with using the safe harbor is maybe overpaying a little bit and tying up the overpayment at zero interest for two or three months. I am lazy; I am willing to take this risk.

Where you have a mix of income, it becomes slightly more complex. If paying the withholding from your IRA funds causes you to withdraw more than you wanted then, yes, you will have to pay on that withdrawal. That is what some of the posters are trying to point out. As a fallback, you may end up making some quarterly payments until the required year-end withholding suits your IRA payout strategy. But again, using the safe harbor strategy there is still no need to estimate anythnig. Worst case, you just write four estimated tax checks to the feds and to your state, each of which is 1/4 of the safe harbor amount.

The number of posters here who seem determined to estimate the current year's taxes amazes me. I must not have the tax-estimation-enthusiasm gene.

Perhaps our situation is simpler than others... but I've sort of designed it that way in the way I've simplified our finances.

It takes less than 1/2 hour for me to estimate our taxable income. There are only 6 items.
1. Interest... the Nov YTD interest from our online savings account website + the Nov interest as an estimate of Dec interest + $5 for interest on local credit union accounts
2. Dividends... a simple 3x9 cell spreadsheet... YTD dividends from Vanguard for our 3 taxable accounts (yours, mine and ours) + estimated year end dividends as provided by Vanguard applied to the number of shares that we own (only 3 tickers) + a SWAG for foreign taxes paid of 6.5% of VTIAX dividends received.. also compute qualified dividend amounts based on percentages provided by Vanguard
3. My pension... known amount
4. LTCG from Vanguard website
5. less the $24,000 standard deduction

This is our projected taxable income before IRA WD.

6. Our IRA withdrawal is the difference between this amount and the top of the 0% LTCG bracket ($72,200 in 2019)

Then I calculate the federal and state income taxes and withhold the requisite amounts for each. Easy peasy.

I have a one screen spreadsheet that covers off the whole thing and updating it takes about 5 minutes.

That said, I don't have a lot of objection to safe harbor but the approach described above is simple and easy so that is what I do.

 

[RunningBum]

If you are itemizing deductions (not so common these days) and trying to limit MAGI for the ACA subsidy or some other reason, it is worth your while to try to get state taxes just right. Any refund goes toward your MAGI the next year, but the over payment does not reduce your MAGI this year. If you're close, it hardly matters, but if you are, say, $1000 over, that's $1000 less you will be able to do in Roth conversions next year to avoid going over the 400% FPL cliff.

Between that, and sometimes widely varying income year to year, I've found it worthwhile to estimate taxes as closely as possible.

With the new tax laws I probably won't itemize deductions again, but I still need to get my income right as close as possible before EOY so I know how much I can convert to my Roth. It's not much more work to figure the taxes on that, especially since I'm using TT to track my estimates. A mild annoyance to put in estimates without the 1099s and 1095, but not too hard.

Without those factors, I would stick with safe harbor of 100% of last year's taxes.

 

[JustCurious]

Without those factors, I would stick with safe harbor of 100% of last year's taxes.

This is correct for those with incomes below $150,000, but over that amount the safe harbor is 110% of last year's tax.

Generally, taxpayers will not have an estimated tax penalty if they make payments equal to the lesser of 90 percent of the tax to be shown on their 2018 return or 100 percent of the tax shown on their 2017 return (110 percent if their income was more than $150,000). See Form 2210 and its instructions for more information.

https://www.irs.gov/newsroom/newly-...lication-can-help-people-pay-the-right-amount

 

[SecondCor521]

This is correct for those with incomes below $150,000, but over that amount the safe harbor is 110% of last year's tax.

Generally, taxpayers will not have an estimated tax penalty if they make payments equal to the lesser of 90 percent of the tax to be shown on their 2018 return or 100 percent of the tax shown on their 2017 return (110 percent if their income was more than $150,000). See Form 2210 and its instructions for more information.

https://www.irs.gov/newsroom/newly-...lication-can-help-people-pay-the-right-amount

And just to be complete, there are four safe harbors: 90% of current taxes, 100%/110% of last year's taxes, owe less than $1000, or have no tax liability the previous year. Meeting any of them will prevent penalties.

 

[MrFlish]

If you withdraw from TIRA just to pay your expenses but don't withhold anything at that time, then when you make yr end withdrawal for taxes (which is an expense), you also need to figure in the tax on that withdrawal.

Got it...thanks. I was a bit slow on the uptake

 

[MrFlish]

Thanks to all for your insight and options. I've got plenty of stuff to think about now and had no idea there were so many possible approaches.

 

[JustCurious]

And just to be complete, there are four safe harbors: 90% of current taxes, 100%/110% of last year's taxes, owe less than $1000, or have no tax liability the previous year. Meeting any of them will prevent penalties.

Does it matter whether the tax payments are in the form of withholding or quarterly payments? In other words, let's say the total amount withheld for 2018 taxes from your W2 income is below the safe harbor levels, but you make a quarterly tax payment for 2018 taxes before the deadline in January of 2019 so that the total tax paid for 2018 (including withholding and quarterly payments) is now above the safe harbor levels, are you safe from the underpayment penalty?

 

[kaneohe]

Does it matter whether the tax payments are in the form of withholding or quarterly payments? In other words, let's say the total amount withheld for 2018 taxes from your W2 income is below the safe harbor levels, but you make a quarterly tax payment for 2018 taxes before the deadline in January of 2019 so that the total tax paid for 2018 (including withholding and quarterly payments) is now above the safe harbor levels, are you safe from the underpayment penalty?

not necessarily...........withholding is treated better than estimated taxes. It is assumed that you paid withholding evenly during the year, even if withheld late in the yr. Estimated taxes as treated as paid when received. You are supposed to pay them in 4 equal (or better) installments during the yr. If you pay them weighted toward end of yr. ,you will have to demonstrate that payment timing following income received timing.

If you received income evenly throughout the yr, and pay only 1 estimated
tax payment during Q4, you will be late on the 1st 3 instllmentsl