IRA withdrawal question

[garyt]

Being a saver all my life I never gave much thought to withdrawal issues, but now a few months from retirement I'm realizing there's things I don't know. So my question is, if you make an IRA withdrawal at the beginning of the year to cover your expenses for that year, do you have to pay taxes upfront?
Not sure if that's totally clear, but if you own your own business or whatever you have to send in taxes quarterly right? Would it be the same for your yearly withdrawal in retirement? Or can you just wait till the end of the year when you file? Probably a very rudimentary question.
thanks

 

[marko]

Being a saver all my life I never gave much thought to withdrawal issues, but now a few months from retirement I'm realizing there's things I don't know. So my question is, if you make an IRA withdrawal at the beginning of the year to cover your expenses for that year, do you have to pay taxes upfront?
Not sure if that's totally clear, but if you own your own business or whatever you have to send in taxes quarterly right? Would it be the same for your yearly withdrawal in retirement? Or can you just wait till the end of the year when you file? Probably a very rudimentary question.
thanks

Most, and I would assume all IRA administrators give you the opportunity to withhold taxes at the time of withdrawal. Many states also take their cut automatically with no action required on your part.

AFAIK, If you elect to not withhold, that's ok too as long as you pay within the withdrawal year; no late penalty but I'll leave that to others more informed.

What I do is pick a % (like 18%), have them withhold that amount and take the rest. Then at tax time I'm either a little behind/ahead of my tax bill and just pay the balance. You can run tax calculators a year's end and then send in a payment in December to get yourself a bit closer to the final number.

 

[jazz4cash]

Yeah I know what you mean. I had several "what about...." moments transitioning from saver to spender.

If you take a normal distribution from an IRA (e.g. you are >59.5) I believe they will withhold federal taxes by default at a 10% rate. But you can request "no withholding" or another percentage up to 100% depending on the custodian. Some places (like Fidelity) will also withhold for state taxes and others (like my credit union) will not withhold state taxes or will only withhold for certain states.

I tend to withhold from each distribution, but some use a strategy of waiting till year end to take a distribution to cover their expected tax liability.

 

[Bir48die]

I withhold both Fed and State taxes mainly to cover capital gains taxes that I incur every year

 

[lemming]

The IRS prefers to get their money spaced evenly throughout the year and requires you to file quarterly tax payments on your annualized income. Even if you cover your tax for the year they might insist on your making a 1040es payment.

 

[kaneohe]

Most, and I would assume all IRA administrators give you the opportunity to withhold taxes at the time of withdrawal. Many states also take their cut automatically with no action required on your part.

AFAIK, If you elect to not withhold, that's ok too as long as you pay within the withdrawal year; no late penalty but I'll leave that to others more informed.

..................................................................

If you do nothing, in my state there is a default % Fed and a default % state withholding. You can request 0 w/h . You do have to follow the IRS rule about paying "on time" for estimated quarterly payments......either 4 equal payments or payments related to income each "quarter". The latter leads to the wonderful F2210 Sch AI which you have to fill out to demonstrate that payments followed income..........kind of like doing your tax return 4 x at one sitting.

If you w/h instead, the rules are more forgiving. W/H is treated as being paid evenly throughout the yr for some reason. As mentioned earlier, some w/h late in the yr and , that's treated as being paid on a timely basis and you're ok
if the amount is right.

Google safe harbor rules for estimated tax for details.

similar thread here: http://www.early-retirement.org/for...r-have-plan-withhold-96250-2.html#post2190505

 

[38Chevy454]

I have the brokerage (Fidelity in my case) withhold fed and state taxes on any withdrawals at the percentage I select that will be close to my required amount. Avoids me having to send it in later or quarterly. Just makes it less complicated to my way of thinking.

 

[sengsational]

I make this recommendation all the time.....pull in December (not January) and set your withholding to pay your taxes for the prior year. You do have to be able to do your taxes without the forms that come in the mail, but that's not hard if things are the same year to year. All of the dollar values should be easy to determine. Sometimes there's a letter in box 7 that you don't know. So you ask and someone tells you, and you continue with the tax software interview. Before the ball drops, I've got a real sharp point on what's going to be the final-final on April 15, so know exactly what to tell the IRA custodian to pull for the withholding. No forms, no checks, no calculations, no risk of penalties. What's not to like?

I avoid any withholding all year, then, around Thanksgiving, I get tax software and do my taxes. I have a single page, where I jot down any odd transactions that happen during the year, and I have a list of regular transactions that affect taxes. So by mid December, I have my taxes "done" with a variable for how much tIRA/401k to pull. I tune that figure, then, when I do the withdrawal, I specify the precise amount to withhold so that I end up owing just a few bucks. It's worked well except for when there was a mandatory high withholding rate. But I haven't pulled from that custodian lately, so it's been really easy. Then, come April, taxes are a trivial task.

 

[gauss]

AFAIK, If you elect to not withhold, that's ok too as long as you pay within the withdrawal year; no late penalty but I'll leave that to others more informed.

This is a bit misleading. It is true you can avoid problems by having withholding done later in the year. If, however, you send in an estimated payment on your own, then there could be a problem.

If you send in any estimated payments, then generally, you must be current each quarter to avoid under-withholding penalty.

Said a bit differently: Third party withholding is handled differently than when you send in your own funds as estimated payments.

-gauss

 

[audreyh1]

The IRS prefers to get their money spaced evenly throughout the year and requires you to file quarterly tax payments on your annualized income. Even if you cover your tax for the year they might insist on your making a 1040es payment.

This doesn’t apply for withholding. If you are doing sufficient withholding from IRA withdrawals whenever you take them then the timing doesn’t matter and no 1040es payments are required. In fact you can choose to do all the tax withholding from your end of year IRA withdrawal and that’s still fine.