CDs maturing - tax liability, underpayment penalty?

[Beststash]

I will have about 400K of CDs that will have matured this year - most are short-term brokered CDs at Fidelity. Not all, some are 3-5 year regular CDs at local bank,Penfed, and NFCU and some IBonds(if that matters. This is new to me. I moved to short-term stuff with new money etc. with the idea being to wait until the FED stops raising rates to get any more stocks.

I have no earned income and usually try and keep my tax liability to under about 1K at tax time. So wondering if I will get an underpayment penalty this year. I don't do estimated taxes, etc. but wondering if there is a way, while I have the time before EOY, to make some sort of payment to solve the possible issue? And if so - can it be done online?

In this case and possibly going forward is there a easy or standard way to deal with this other than estimated payments? I normally do my own taxes because they are not complex. No earned income or deductions and only capital gains and interest and SS, pension monies etc.

 

[Car-Guy]

If you have an tIRA or 401k at a broker, just make a withdrawal and have them withhold the necessary tax. I do it every year at Schwab in late December to cover my estimated tax short fall.


Of course if the maturing CD's are within a tIRA or 401k, no taxes are due. Until you make a withdrawal.

 

[Beststash]

Cool! Exactly the kind of thing I was hoping for. Thanks!!

 

[Scusan]

I'm considering this (withdraw from 401k/Ira, have this money with held for tax obligation) too.

Looking at the "60 day rule" to then replenish the funds back into the 401. Anyone done this and have lessons learned to share? Talking with my Fido person about it soon.

 

[jazz4cash]

I'm considering this (withdraw from 401k/Ira, have this money with held for tax obligation) too.

Looking at the "60 day rule" to then replenish the funds back into the 401. Anyone done this and have lessons learned to share? Talking with my Fido person about it soon.

60 day rollover rule is for IRA, not 401k. You can usually transfer 401k funds to an IRA and then do the rollover. 20% withholding is mandatory so you’ll need to take money from somewhere to complete the rollover.

 

[jim584672]

You need to make estimated tax payments for what you paid in the previous year so you "safe harbor" against any penalties. I-Bonds are not taxed until they are redeemed. The fact some CDs are maturing would have no tax impact, assuming you bought them at par. You can set up a tax payment account at: https://www.eftps.gov/eftps/

 

[donheff]

You need to make estimated tax payments for what you paid in the previous year so you "safe harbor" against any penalties. I-Bonds are not taxed until they are redeemed. The fact some CDs are maturing would have no tax impact, assuming you bought them at par. You can set up a tax payment account at: https://www.eftps.gov/eftps/

I wasn't aware of that. Does it obviate the need for quarterlies? I currently use my pension to pay my tax, and DW's pension and SS taxes. But this site would be nice to top up when I see a need, rather than changing my withholding for the last few months of the year.

I noticed they say they support Edge, Chrome, and Firefox on Windows, but say nothing about any of those browsers on Macs and Linux. Seems questionable.

 

[jim584672]

I wasn't aware of that. Does it obviate the need for quarterlies? I currently use my pension to pay my tax, and DW's pension and SS taxes. But this site would be nice to top up when I see a need, rather than changing my withholding for the last few months of the year.

I noticed they say they support Edge, Chrome, and Firefox on Windows, but say nothing about any of those browsers on Macs and Linux. Seems questionable.

It will work with Linux. Usually when tax software does a return it creates quarterly estimated tax forms for the next year, so technically it should be quarterly, but it may not matter if the amounts are not too large.

 

[Out-to-Lunch]

I'm considering this (withdraw from 401k/Ira, have this money with held for tax obligation) too.

Looking at the "60 day rule" to then replenish the funds back into the 401. Anyone done this and have lessons learned to share? Talking with my Fido person about it soon.

Yes, I have done this. I took the money out of a 403(b), and had 99% withheld to meet my tax obligation on something else (a Roth conversion, not that it matters). Later (within 60 days), I contributed the same amount to my tIRA, deeming it as "an indirect rollover" from the 403(b) to a tIRA.

One nice thing is that you are limited to only one indirect rollover per year from tIRA to tIRA accounts, but there are NO LIMITS on indirect rollovers from 401/403/457 plans to iIRAs. So you can do this as often as you like or need.


Here is a thread with a lot of info on this:
https://www.early-retirement.org/forums/f28/estimated-payments-timing-111924.html

And here is another, later one: https://www.early-retirement.org/forums/f28/estimated-tax-catchup-withholding-and-penalties-116242.html

And here is a useful page on how to report this on your 1040 form: https://www.stratatrust.com/insights/how-to-report-rollovers-on-your-tax-return/

 

[Montecfo]

I wasn't aware of that. Does it obviate the need for quarterlies? I currently use my pension to pay my tax, and DW's pension and SS taxes. But this site would be nice to top up when I see a need, rather than changing my withholding for the last few months of the year.

yes. withholding is assumed to occur ratably throughout the year, regardless of when it actually takes place. So you can pull some taxable IRA funds and withhold at highest level to tweak your withholding say late in the year (or any time).

Just know the gross value of the withdrawal is itself taxable so work that into your computations.

 

[Scusan]

Thanks to JAZZ4CASH and OUT TO LUNCH for the info. That will save me time and headache.

This is my first year on "retired" (much lower) cash flow. In addition to pension income (which I anticipated), I am making a lot of extra $$$ on treasuries and CDs as well. I'd normally just do the "safe harbor" method, but I made a lot more while still getting a paycheck in 2022 so 110% of that (high AGI) would be a huge overpayment.

I've fully converted my traditional IRA, so I will move $$ from 401 into an IRA, then do the rollover from there. I believe there's a 365 day limit before doing it again, but hopefully next year I'll have a better idea of taxes and it will also be easier to just do the 110% "safe harbor" trick.

Good "problems" to have I guess.

 

[Out-to-Lunch]

Thanks to JAZZ4CASH and OUT TO LUNCH for the info. That will save me time and headache.

De rien!

This is my first year on "retired" (much lower) cash flow. In addition to pension income (which I anticipated), I am making a lot of extra $$$ on treasuries and CDs as well. I'd normally just do the "safe harbor" method, but I made a lot more while still getting a paycheck in 2022 so 110% of that (high AGI) would be a huge overpayment.

I've fully converted my traditional IRA, so I will move $$ from 401 into an IRA, then do the rollover from there. I believe there's a 365 day limit before doing it again, but hopefully next year I'll have a better idea of taxes and it will also be easier to just do the 110% "safe harbor" trick.

Good "problems" to have I guess.

Can you do partial distributions from your 401? If so, why not do the distribution -> indirect rollover to tIRA as I mentioned earlier? That way, you could do more before 365 days from now if needed.

 

[lucky penny]

You need to make estimated tax payments for what you paid in the previous year so you "safe harbor" against any penalties. I-Bonds are not taxed until they are redeemed. The fact some CDs are maturing would have no tax impact, assuming you bought them at par. You can set up a tax payment account at: https://www.eftps.gov/eftps/

Not sure what you're talking about here. I have some long-term CDs & short-term T-bills maturing this year (none of which are in IRAs) & earned significant interest on all, & all will be taxed. As in the past, I will increase the withholding on my RMDs from IRAs to cover the prospective taxes.

 

[jim584672]

Not sure what you're talking about here. I have some long-term CDs & short-term T-bills maturing this year (none of which are in IRAs) & earned significant interest on all, & all will be taxed. As in the past, I will increase the withholding on my RMDs from IRAs to cover the prospective taxes.

It goes without saying you would owe on the interest received. The OP is mentioning maturing items and taxes, which is why I am saying maturing items have no tax impact if bought at par, T-Bills are not bought at par, but at a discount. (In after tax accounts, retirement accounts have different rules.)

 

[jazz4cash]

Thanks to JAZZ4CASH and OUT TO LUNCH for the info. That will save me time and headache.

This is my first year on "retired" (much lower) cash flow. In addition to pension income (which I anticipated), I am making a lot of extra $$$ on treasuries and CDs as well. I'd normally just do the "safe harbor" method, but I made a lot more while still getting a paycheck in 2022 so 110% of that (high AGI) would be a huge overpayment.

I've fully converted my traditional IRA, so I will move $$ from 401 into an IRA, then do the rollover from there. I believe there's a 365 day limit before doing it again, but hopefully next year I'll have a better idea of taxes and it will also be easier to just do the 110% "safe harbor" trick.

Good "problems" to have I guess.

The 365 day limit only applies if they send a check or transfer payable to you. The 365 day limit and the 60 day rollover go together. If you transfer funds directly between IRA custodians there is no 365 day limit. You can also have current custodian make the check payable to “New Custodian FBO Scusan”.

 

[Out-to-Lunch]

I'm considering this (withdraw from 401k/Ira, have this money with held for tax obligation) too.

Looking at the "60 day rule" to then replenish the funds back into the 401. Anyone done this and have lessons learned to share? Talking with my Fido person about it soon.

The 365 day limit only applies if they send a check or transfer payable to you. The 365 day limit and the 60 day rollover go together. If you transfer funds directly between IRA custodians there is no 365 day limit. You can also have current custodian make the check payable to “New Custodian FBO Scusan”.

jazz, scusan is not looking to make a trustee-to-trustee transfer. He or she is looking to make a withdrawal to be withheld for paying taxes (which makes them "ratably contributed" as far as the IRS is concerned), and then later make up for that by making an indirect transfer to a tIRA.

And, again, the 365 day limit does not apply to 401(k) accounts.