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Old 10-24-2020, 07:38 PM   #41
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Thanks! Thats why I keep paying my dues to belong to this Community! It definitely pays for itself. Thanks to ALL of you since YMMV.
It also might interest people generally to know that there are at least three (*) different safe harbors, and if you meet any of them you won't owe underpayment penalties.

(*) Three formal ones and one other that I consider to be a safe harbor - not owing any federal income taxes in the prior year. There are also all sorts of exceptions for natural disasters, being disabled, etc.
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Old 10-24-2020, 07:41 PM   #42
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It also might interest people generally to know that there are at least three (*) different safe harbors, and if you meet any of them you won't owe underpayment penalties.

(*) Three formal ones and one other that I consider to be a safe harbor - not owing any federal income taxes in the prior year. There are also all sorts of exceptions for natural disasters, being disabled, etc.
Heh, heh, how about Covid? Do you think they'd buy that as an excuse? NAAAAaaaaahhhhhhh! But YMMV.
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Old 10-24-2020, 07:45 PM   #43
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Heh, heh, how about Covid? Do you think they'd buy that as an excuse? NAAAAaaaaahhhhhhh! But YMMV.
The IRS extended due dates for 2019 income tax payments and the first two 2020 quarterly estimated payment dates due to covid this year.

https://www.irs.gov/newsroom/filing-...ns-and-answers

These extensions were automatic and for all taxpayers.
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Old 10-24-2020, 07:48 PM   #44
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The IRS extended due dates for 2019 income tax payments and the first two 2020 quarterly estimated payment dates due to covid this year.

https://www.irs.gov/newsroom/filing-...ns-and-answers

These extensions were automatic and for all taxpayers.
I was thinking about NEXT year, so I'm not counting on it but YMMV.
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Old 10-24-2020, 07:51 PM   #45
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I don't know if this works for you, but we don't figure estimated taxes and we don't make quarterly payments. Every December we just pay the safe harbor tax amount (100% or 110% of last year's tax) by drawing from our IRAs and having 100% of the draw amount withheld as tax payments.

The key to this is that withholding is considered to have been paid over the whole year, so no need to worry about quarterly payments. The 1099s list the withheld amounts and you just plug them into the appropriate boxes in the forms.

Worst case is we overpay a little, but with interest rates at zero that is not particularly painful. Actually, my sloth usually continues and I just let the gummint keep small overpayments and apply to the next tax bill.
I like this method. I may adopt it.
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Old 10-25-2020, 09:27 PM   #46
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I don't know if this works for you, but we don't figure estimated taxes and we don't make quarterly payments. Every December we just pay the safe harbor tax amount (100% or 110% of last year's tax) by drawing from our IRAs and having 100% of the draw amount withheld as tax payments.

The key to this is that withholding is considered to have been paid over the whole year, so no need to worry about quarterly payments. The 1099s list the withheld amounts and you just plug them into the appropriate boxes in the forms.

Worst case is we overpay a little, but with interest rates at zero that is not particularly painful. Actually, my sloth usually continues and I just let the gummint keep small overpayments and apply to the next tax bill.
This is close to what we do. Whenever I take IRA withdrawals during the year, I usually do a withholding at that time based on where I think taxes will be so I am sort of in the ballpark. Then, in December, I check and see how I have done. If I haven't withheld enough (which I usually haven't by a little), I then do a withholding that will catch up on the taxes.

I do it this way rather than solely at the end of the year because I want to withdraw it and withhold it during the year when I think is the best time which may not be December. So I use December only to catch up make sure we have withheld enough.
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Old 10-26-2020, 06:10 AM   #47
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I don't know if this works for you, but we don't figure estimated taxes and we don't make quarterly payments. Every December we just pay the safe harbor tax amount (100% or 110% of last year's tax) by drawing from our IRAs and having 100% of the draw amount withheld as tax payments.

The key to this is that withholding is considered to have been paid over the whole year, so no need to worry about quarterly payments. The 1099s list the withheld amounts and you just plug them into the appropriate boxes in the forms.

Worst case is we overpay a little, but with interest rates at zero that is not particularly painful. Actually, my sloth usually continues and I just let the gummint keep small overpayments and apply to the next tax bill.

This is what I basically do, but I take it one step further.

Withing 60 days of the IRA distribution that is used to pay the taxes, I roll after-tax funds back into the IRA to make the IRA whole again.

This has the effect of transforming after-tax $ that I would rather see in retirement accounts, into Roth $.

BTW, I am currently Roth converting enough each year until 2025 ,when the TCJA expires, to complete all my conversions. As such these withholding amounts are about 5x the amount that they would normally be.

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Old 10-31-2020, 06:56 AM   #48
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I've saw the term 'safe harbor' used a number of time in this thread, I've also seen it mentioned in relation to 401K's I think it was. What does 'safe harbor' mean, sounds like a boating term to me?
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Old 10-31-2020, 07:30 AM   #49
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I've saw the term 'safe harbor' used a number of time in this thread, I've also seen it mentioned in relation to 401K's I think it was. What does 'safe harbor' mean, sounds like a boating term to me?
From Wikipedia..."A safe harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. It is usually found in connection with a more-vague, overall standard. By contrast, "unsafe harbors" describe conduct that will be deemed to violate the rule."

I'm sure it is a boating term... where can I take the boat so it will be shielded from bad things?

With respect to estimated tax payments the IRS defines the safe harbor for estimated tax payment penalties as..."Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. "

https://www.irs.gov/taxtopics/tc306
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Old 10-31-2020, 08:39 AM   #50
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I've saw the term 'safe harbor' used a number of time in this thread, I've also seen it mentioned in relation to 401K's I think it was. What does 'safe harbor' mean, sounds like a boating term to me?
Very important to know regarding taxes.
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What is the Safe Harbor Rule?
The IRS knows that people who aren't working a traditional W-2 job might have irregular income. So they offer a little leeway and won't punish you if you're a little short.

The estimated safe harbor rule has three parts:
  • If you expect to owe less than $1,000 after subtracting your withholding, you're safe.
  • If you pay 100% of your tax liability for the previous year via [4 equal]* estimated quarterly tax payments, you're safe. If your adjusted gross income for the year is over $150,000 then it's 110%.
  • If you pay within 90% of your actual liability for the current year, you're safe.
So they expect you to be close (or over), and won't penalize you if you don't get it exactly right.

Your state will also have estimated tax payment rules that may differ from the federal rules.
from https://wallethacks.com/estimated-ta...fe-Harbor-Rule

* if your estimated tax payments vary, or you paid less taxes early in the year and more later, you may need to file form 2210 with your return to avoid penalty.
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Old 10-31-2020, 09:31 AM   #51
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... Withing 60 days of the IRA distribution that is used to pay the taxes, I roll after-tax funds back into the IRA to make the IRA whole again.

This has the effect of transforming after-tax $ that I would rather see in retirement accounts, into Roth $. ...
That's very clever. It won't work for us because we no longer have any significant money outside of our tax-sheltered stuff, but I like it.

If you pay back the IRA draw then to the tax man it never happened, but the money you pay back will, when you draw it, eventually pay that tax. How does the word "Roth" figure here? @pb4, are you here? Am I right on this?
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Old 10-31-2020, 09:36 AM   #52
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This is close to what we do. Whenever I take IRA withdrawals during the year, I usually do a withholding at that time based on where I think taxes will be ... I do it this way rather than solely at the end of the year because I want to withdraw it and withhold it during the year when I think is the best time which may not be December. So I use December only to catch up make sure we have withheld enough.
Anytime we buy or sell equities we are market timing to some degree. But IMO that can be a decision that is independent of when we actually give our uncle the money. For example, if I think July is the peak for the year and I need to sell equities to pay the tax, I could do that and park the proceeds until December. In this rate environment I might not make much, but it's more than I would make if I just sent it along to our uncle immediately.
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Old 10-31-2020, 05:16 PM   #53
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....

If you pay back the IRA draw then to the tax man it never happened, but the money you pay back will, when you draw it, eventually pay that tax. How does the word "Roth" figure here? @pb4, are you here? Am I right on this?
I have the same question/thought, it's still IRA money subject to taxes upon withdrawal - not equivalent to Roth money.
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Old 10-31-2020, 07:16 PM   #54
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I have the same question/thought, it's still IRA money subject to taxes upon withdrawal - not equivalent to Roth money.
You can do the same trick while doing a Roth conversion......withhold some amount for taxes, then replace that amount into the Roth within 60 days.
An added bonus is that you don't have to worry about doing it more than once per 365 days like you have to do with TIRA since conversions are not restricted by this rule.
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Old 10-31-2020, 07:47 PM   #55
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And the main thing you are getting from this trick is an end of year tax withholding that counts as paid evenly over the year instead of paying estimated taxes directly on schedule?

Since I often use the annualized income method for paying estimated taxes I’m not sure this would do anything for me. If I determine the tax amount, I can just pay right after the end of each tax quarter based on taxable income received so far.
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Old 10-31-2020, 07:55 PM   #56
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You can do the same trick while doing a Roth conversion......withhold some amount for taxes, then replace that amount into the Roth within 60 days.
An added bonus is that you don't have to worry about doing it more than once per 365 days like you have to do with TIRA since conversions are not restricted by this rule.
Has anyone really done this? Reading the Roth conversion rules straight from the IRS: https://www.irs.gov/retirement-plans...th-conversions

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How do I convert my traditional IRA to a Roth IRA?

You can convert your traditional IRA to a Roth IRA by:
  • Rollover – You receive a distribution from a traditional IRA and contribute it to a Roth IRA within 60 days after the distribution (the distribution check is payable to you);
  • Trustee-to-trustee transfer – You tell the financial institution holding your traditional IRA assets to transfer an amount directly to the trustee of your Roth IRA at a different financial institution (the distributing trustee may achieve this by issuing you a check payable to the new trustee);
  • Same trustee transfer – If your traditional and Roth IRAs are maintained at the same financial institution, you can tell the trustee to transfer an amount from your traditional IRA to your Roth IRA.
Seems to me the only one this works for is the Rollover, and that they might only let the amount of the check be put in the Roth, and that check would have had the taxes taken out from it.
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Old 10-31-2020, 10:43 PM   #57
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"December 16, 2019 at 4:27 am #4999

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Yes, this is all about paying taxes via withholding to avoid any underpayment penalty while also avoiding the 2201 AI form. It does not have to be done in conjunction with a conversion, but certainly can be.

For example, if you want to convert 100k AND have 22k withheld, your conversion will actually be only 78k. To complete the conversion you must come up with 22k from your other funds and roll it into your Roth IRA within 60 days of receipt of the initial distribution. Since this is a conversion, the one rollover limit does not apply. "

https://fairmark.com/forum/topic/wit...g-w-h-in-tira/
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Old 11-01-2020, 07:12 AM   #58
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Thanks for the link, kaneohe. As usual Alan S. is thorough on the topic.

It occurs to me that for handling taxes in a Roth conversion, this isn't that useful. To use this method, you'll have to come up with the $22K (in that example) within 60 days. For the traditional method, you'd pay the estimated tax at the end of the quarter, which might be more than 60 days away. For the latter you might also have to file form 2210 to show the timing of income.

A better tax play would be to do a Roth conversion at the beginning of the year, and make equal quarterly estimated tax payments throughout the year. Or do the tIRA withdrawal and return at the end of the year, which works to handle taxes on any kind of taxable income you have throughout the year.
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Old 11-01-2020, 08:57 AM   #59
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This is very interesting. I read the linked thread twice, but it's still not crystal clear how this works.

Let's say I do a $25K tIRA withdrawal in late Dec 2020 with 100% withholding and then replace the $25K within 60 days from my taxable account... ~mid Feb 2021. Obviously my 1099-R for 2020 will show $25K of taxable tIRA distribution. How exactly does the mid-Feb 2021 "rollover" come into play on my 2020 tax return? Do I just manually adjust the IRA distribution amount? What am I missing?
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Old 11-01-2020, 09:54 AM   #60
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This is very interesting. I read the linked thread twice, but it's still not crystal clear how this works.

Let's say I do a $25K tIRA withdrawal in late Dec 2020 with 100% withholding and then replace the $25K within 60 days from my taxable account... ~mid Feb 2021. Obviously my 1099-R for 2020 will show $25K of taxable tIRA distribution. How exactly does the mid-Feb 2021 "rollover" come into play on my 2020 tax return? Do I just manually adjust the IRA distribution amount? What am I missing?
I would just replenish before the end of the tax year and avoid the potential hassle and ambiguity. Pay in November if you need extra time. You might want to talk to your IRA custodian and ask them how the 1099 would be handled. Or your CPA.
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