Retirement and Withholding

Throughout my working life, the government has made sure that I prepay my taxes through withholding and estimated tax payments. If I don't pay enough ahead of time, there are penalties.

Once retired, you could have a considerable tax liability from IRA distributions or Roth conversions. But you don't have to pay any tax ahead of time, yes?

[Martha]

Quarterly estimated taxes.

[setab]

TSP takes a flat 20 percent out if you cash any or part of it in when you retire unles you roll it over.

setab

OK, I see. *Even individuals have to send in estimated taxes. *I thought that was *just a company thing.

[SteveR]

Quote:

Originally Posted by TromboneAl OK, I see. *Even individuals have to send in estimated taxes. *I thought that was *just a company thing.

I am sorry to say it is so.

Qtrly taxes keep you from paying less than the 95%(?) in tax from the previous year's tax bill in the current tax year. Uncle Sammy wants his your money now rather than later. Even with withholding on pension income you may need to do estimated tax payments on any other income you get during the year to avoid penalties and interest charges. It sucks but it is the law.

[maddythebeagle]

I am glad you asked the question My deferred compensation plan through work auto. withholds taxes unless it is a small amount taken out each year (I think it was in the 10-15k range) that you can request no withholding

[Nords]

Quote:

Originally Posted by TromboneAl Once retired, you could have a considerable tax liability from IRA distributions or Roth conversions.* But you don't have to pay any tax ahead of time, yes?

Well, "ahead of time", technically no. You don't have to pay it until it's due.

But if you work through the estimated tax form, you may learn that you have estimated taxes due on 15 Jan, 15 Apr, 15 June (ouch), & 15 Sep. It depends on what time of the year you "earn" a slug of income and how much tax would normally be due on the proceeds. You generally don't have to pay more than 90% of what you paid the year before but there are a ton of penalized exceptions.

When my FIL retired he received a big comp check in lieu of his vacation time. It carried a boilerplate warning that "tax may be due on this distribution" but he saw that some witholding had been taken out and he never thought to check the calculation. Unfortunately he was underwitheld and ended up contributing another $200 penalty the following year.

IRS Pub 505. The rules are all buried in there somewhere...

[Rustic23]

If I scheduled my withdrawl from my IRA for each December 29, then would I earn the money at the end of the year, and thus not have to pay quarterly taxes. If so I could earn interest on the 'governments' money.

[MJ]

I thought I read that in a forgotten pub, you are required to meet 100% of the previous tax year obligation if your the current year tax due will be greater.
Is the requirement different for quarterly estimates which is what I am now doing?

I was also wondering what if the following occurred,
you had $100k income in 2005
you expect $40k income in 2006
your estimated quarterly's reflect the $40k income,
you made an additional $6k, from unanticipated ordinary non-investment source in the last 2 months of 2006
you adjust the 4th quarter est. to reflect the additional income
turbo tax still calculates an estimated tax penalty since there is no place on the form to enter when the income was earned
does the IRS expect you to pay the penalty regardless
or can you exclude it from the 1040 form with an attached written explanation.

Just curious

MJ

[Martha]

Try form 2210, which deals with the annualized installment method of paying estimated taxes, useful when your income isn't even throughout the year. see http://www.irs.gov/publications/p505/ch02.html#d0e7368
www.irs.gov/pub/irs-pdf/f2210.pdf

This might get you out of the penalty.

[MJ]

Thanks Martha.