Income Taxes During Retirement

[LXEX55]

I was told that during retirement, when tapping into your 401k you should pay income taxes twice per year, as opposed to just once per year. I have not gotten a chance to speak to my tax guy yet, but, is this true?

 

[meierlde]

I was told that during retirement, when tapping into your 401k you should pay income taxes twice per year, as opposed to just once per year. I have not gotten a chance to speak to my tax guy yet, but, is this true?

If you mean estimated taxes that is one way to pay them, the better alternative is of course to have the amount withheld from the distribution you make. (Just look at your top tax bracket and pick that percentage). There is still only 1 filing deadline per year.

 

[Winemaker]

I only pay once, but usually it involves a $20 penalty or so. I have pension, 401k, divvies and interest, and rental income. The rental income fluctuates, depending how I elect to control it. That is, I may take a longer time to "rehab" a unit, and may change out things because "they're due", increasing my costs and lowering my income.

 

[Gotadimple]

The IRS will expect that you are paying throughout the year, but there is no penalty for making payments less frequently. Some have their taxes deducted from their 401K withdrawal, but that means you need to take out 10% more (if that is the amount you are having withheld). I prefer to pay taxes from my taxable savings rather and keep the investment working until I need it.

 

[bingybear]

so far I have been paying once a year. However, I have not taken out of 401k's as I don't have any. I have done roth conversions. I let my tax refund (if any) go toward the next year taxes. Then in the first quarter I pay estimated taxes to bring the total to what I paid in taxes the previous year. So far this has worked well. I may do much larger roth conversion this year (doing them in December). If so, I will likely at the same time pay a second estimated just after doing the conversion. I don't decide how much to convert until late December typically because I don't know distributions from investments until then.

So far no penalties.

 

[audreyh1]

I was told that during retirement, when tapping into your 401k you should pay income taxes twice per year, as opposed to just once per year. I have not gotten a chance to speak to my tax guy yet, but, is this true?

If enough taxes are withheld as part of your withdrawal I think you get get away with once a year at the end of the year.

 

[Winemaker]

I believe you have to be within 100% of the previous years tax payment or 90% of current tax as not to incur a penalty.

 

[Jerry1]

I believe you have to be within 100% of the previous years tax payment or 90% of current tax as not to incur a penalty.

^^This^^

Safe harbor is to pay in 110% of the prior year's tax. Plus, in any case, you need to match the timing of your payments with the timing of your income. Therefore, for example, if you take a once per year distribution and have no other income, then paying once per year is fine.

If you had distributions made monthly, then the default (quarterly payments) is acceptable.

 

[Souschef]

I use the iRS website and pay quarterly. I also do it for the sate of CA.
The strange thing is that CA wants it 30%,40%,0% and 30%. strange

 

[meierlde]

^^This^^

Safe harbor is to pay in 110% of the prior year's tax. Plus, in any case, you need to match the timing of your payments with the timing of your income. Therefore, for example, if you take a once per year distribution and have no other income, then paying once per year is fine.

If you had distributions made monthly, then the default (quarterly payments) is acceptable.

Better to max witholding as it eliminates the whole timing issue, as withholding is credited evenly. Anyway the rate for 2017 is 4%. If you look at form 2210 you find that if you have had more than 90% of tax due withheld the process for penalties stops before any issue of timing.
Note you can have SS withold up to 25% as well as from pensions and 401k/ira distributions (you can pick the percent).

 

[AnneDave]

B.

 

[Jerry1]

Safe harbor is to pay in 110% of the prior year's tax. Plus, in any case, you need to match the timing of your payments with the timing of your income. Therefore, for example, if you take a once per year distribution and have no other income, then paying once per year is fine.

If you had distributions made monthly, then the default (quarterly payments) is acceptable.

Better to max witholding as it eliminates the whole timing issue, as withholding is credited evenly. Anyway the rate for 2017 is 4%. If you look at form 2210 you find that if you have had more than 90% of tax due withheld the process for penalties stops before any issue of timing.
Note you can have SS withold up to 25% as well as from pensions and 401k/ira distributions (you can pick the percent).

Agreed - Withholding is better.

True that if you have 90% of the tax withheld, you're good to go, but the 110% safe harbor is on the prior year's tax. That comes into play if you have a large increase in tax liability from the prior year and you're not sure what 90% of the current tax will be. In that case, if you've paid in 110% of the prior year tax and below the 90% of the current year's tax, you're still okay.

 

[gerntz]

Make less pay less.

 

[RobbieB]

I like to make more and pay more.

Quarterly estimated payments, nothing withheld. Been doing it for years now, first for Pops and now for me.

 

[Al18]

With 401K withdrawals, 20% taxes are automatically withheld for Federal taxes and depending on your state, state taxes may also be withheld.

 

[audreyh1]

True that if you have 90% of the tax withheld, you're good to go, but the 110% safe harbor is on the prior year's tax. That comes into play if you have a large increase in tax liability from the prior year and you're not sure what 90% of the current tax will be. In that case, if you've paid in 110% of the prior year tax and below the 90% of the current year's tax, you're still okay.

Yep - true for me for 2017. That’s why it’s a safe harbor.

 

[bingybear]

First year of ER I paid estimated that was a fraction of the previous year's taxes. The following year I paid estimated to the amount of taxes the previous year. I believe the 110% is required for higher payers.
This year I'm doing the same. However I may jump my roth conversions much higher. If so, I will jump my estimated based on my calculations at the time. I don't want to use withholding as I think that will complicate things as I want to pay taxes with after tax $.

 

[kannon]

Question - I looked up the various ways to pay federal and state income taxes during the year. On the IRS site you can prepay your taxes and also schedule payments. Was wondering, to keep things more organized, has anyone scheduled payments in their online checking account for the IRS? For their state tax?

Thanks

 

[kaneohe]

With 401K withdrawals, 20% taxes are automatically withheld for Federal taxes and depending on your state, state taxes may also be withheld.

I know for sure that for geezers taking RMDs, you can opt out of withholding.
Not as sure but I thought if you did a direct rollover to another retirement plan
or IRA, that you could do the same.

 

[bingybear]

we are not taking income from IRAs yet (56yo) and our taxable income is due to investments and roth conversions. Right now I schedule my 1st payment and that is usually it. This amount is enough if I don't do higher roth conversions or large changes in investments. So scheduling beyond the 1st payment makes little sense since I can't guess what the amount should be.

 

[Jerry1]

With 401K withdrawals, 20% taxes are automatically withheld for Federal taxes and depending on your state, state taxes may also be withheld.

Having just retired and will not withdraw from my 401K until next year, I haven't looked into this yet, but I certainly hope that it is not required to have 20% withheld. My expectation is that my Federal taxes will be less than 10% given that I will stay just below the 12% tax bracket. Paying 20% would be ridiculously high for my situation. I'll discuss that with Fidelity at my meeting with them on Monday. I would hope that 20% is a default and that it can be changed with a simple notification.

 

[golfnut]

Having just retired and will not withdraw from my 401K until next year, I haven't looked into this yet, but I certainly hope that it is not required to have 20% withheld. My expectation is that my Federal taxes will be less than 10% given that I will stay just below the 12% tax bracket. Paying 20% would be ridiculously high for my situation. I'll discuss that with Fidelity at my meeting with them on Monday. I would hope that 20% is a default and that it can be changed with a simple notification.

Curious to know what Fidelity tells you. Earlier in the year, Vanguard (who is the admin. of our 401k) confirmed 20% withholding is mandated by IRS. However, distributions from iras have no such mandate. Does not make sense to me.

 

[cathy63]

Having just retired and will not withdraw from my 401K until next year, I haven't looked into this yet, but I certainly hope that it is not required to have 20% withheld. My expectation is that my Federal taxes will be less than 10% given that I will stay just below the 12% tax bracket. Paying 20% would be ridiculously high for my situation. I'll discuss that with Fidelity at my meeting with them on Monday. I would hope that 20% is a default and that it can be changed with a simple notification.

20% is the required federal tax withholding amount for all taxable 401K distributions. There's no way to adjust it.

You can avoid it by doing a partial rollover from the 401K to the IRA (has to be a trustee-to-trustee rollover) and then withdrawing that amount from the IRA.

 

[Jerry1]

20% is the required federal tax withholding amount for all taxable 401K distributions. There's no way to adjust it.

You can avoid it by doing a partial rollover from the 401K to the IRA (has to be a trustee-to-trustee rollover) and then withdrawing that amount from the IRA.

Thanks. I was missing an important point. I'm still calling it a 401K but in reality, I've rolled it over to an IRA since I've left the company. That makes better sense. Yes, 401k's have the 20% requirement. I'll be drawing from an IRA.

 

[LOL!]

The 110% number thrown around in this thread is for high income folks. Low income folks like me can use 100% instead.

See this list/explanation of safe harbor rules:
https://www.forbes.com/sites/greats...o-avoid-irs-underpayment-penalty-for-june-15/

I think IRA tax withholding is considered occurring evenly through the year even if a year-end IRA withdrawal and withholding is made. OTOH, paying Federal income taxes is so easy that one can pay many different ways. I use IRS DirectPay which is pretty much like online bill paying at your bank. I can pay any time I want throughout the year.