Estimated Tax Calculation Method for Quarterly IRA Withdrawals

[Free at Last]

For the past few years I have withdrawn enough funds in January to live off of for the year and held them in an Ally account paying 4% interest. Based on that acton, I would pay the same quarterly estimated Fed and State taxes when due through out the year. For 2025 I'm planning on withdrawing from the IRA quarterly, only what I need for the quarter (about $32,500). I assume that the April payment would be the smallest, then incrementally increase until the January 2026 that would be the largest and that the sum of all four would equal the total tax due.

Based on this method, how are quarterly taxes estimated?

 

[Marc]

I have always withdrawn funds from IRA as needed; no reason to earn taxable interest income. I estimate at beginning of year how much money I will take out of IRA; other income for year; and calculate predicted tax bill. I then go into EFTPS and identify four equal payments. I also have started making sure I satisfy safe harbor restrictions. If you satisfy safe harbor there is really no need to match up withdrawals and estimated payments.

If you find that you really screwed up just take an extra IRA withdrawal and allocate it all to income taxes; it will be deemed to have been paid evenly throughout the year.

 

[audreyh1]

How to estimate taxes paid? That’s actually a big question.

First I recommend you learn about safe harbor rules. You pretty much have to figure out 4 equal payments based on expected income for the year. No, you don’t get to play less initially. You have to pay based on total year expected taxable income.

HOWEVER, and this is a big caveat, you have an opportunity to withhold federal taxes when you make an IRA withdrawal and this simplifies things for you. The timing of the tax payments don’t matter so much as long as by the last withdrawal you’ve reached your safe harbor for the year.

Safe harbor rules are you’ve paid 90% of current year taxes or 100% of prior year taxes (110% for higher AGI) in 4 equal payments at each of the estimated tax quarter deadlines. If you are withholding this doesn’t apply as long as you meet the total amount by year end. It is also possible to pay amounts for each tax quarter based on income YTD. This is called the annualized income method. To avoid penalty you have to file form 2210 to show your income each quarter. It’s a bit more work.

 

[Free at Last]

I have always withdrawn funds from IRA as needed; no reason to earn taxable interest income. I estimate at beginning of year how much money I will take out of IRA; other income for year; and calculate predicted tax bill. I then go into EFTPS and identify four equal payments. I also have started making sure I satisfy safe harbor restrictions. If you satisfy safe harbor there is really no need to match up withdrawals and estimated payments.

If you find that you really screwed up just take an extra IRA withdrawal and allocate it all to income taxes; it will be deemed to have been paid evenly throughout the year.

So what if by years end you didn't distribute what you planned (assume less) and you have overpaid your estimated taxes. Is there and adjustment to the estimated tax amount through the year, if you have distributed less than planned?

 

[Marc]

So what if by years end you didn't distribute what you planned (assume less) and you have overpaid your estimated taxes. Is there and adjustment to the estimated tax amount through the year, if you have distributed less than planned?

I've never had that happen; but an easy solution is to decrease the final estimated payment on 15 January.

 

[audreyh1]

I've never had that happen; but an easy solution is to decrease the final estimated payment on 15 January.

Exactly. I have done this a few times as our annual investment income is very unpredictable.

 

[Niuatoputapu]

Here is what I would do:

A) Estimate "annual cash need from IRA". In January, convert that amount to a Roth IRA.
B) Estimate "income tax withholding need from IRAs". In December, withdraw from IRA and tax withhold that amount. (I just did that last week and 90% of my withdrawal was withheld for income taxes).
C) Withdraw cash from Roth IRA throughout the year.

 

[I am He]

YMMV, but we've not paid quarterly but in Dec, moved withdrawals from the IRA paid directly to the IRS. Granted all situations are different and we're not withdrawing those funds until Dec so if they investigated it, the payment would coincide with the "income."

 

[Healthy Lifestyle]

How to estimate taxes paid? That’s actually a big question.



HOWEVER, and this is a big caveat, you have an opportunity to withhold federal taxes when you make an IRA withdrawal and this simplifies things for you. The timing of the tax payments don’t matter so much as long as by the last withdrawal you’ve reached your safe harbor for the year.

Safe harbor rules are you’ve paid 90% of current year taxes or 100% of prior year taxes (110% for higher AGI) in 4 equal payments at each of the estimated tax quarter deadlines. If you are withholding this doesn’t apply as long as you meet the total amount by year end.

" If you are withholding this doesn’t apply as long as you meet the total amount by year end."

Question, when withholding the taxes for my Roth conversion (done last month), does it add to my total income for the year?

 

[Sunset]

I tried to calculate accurately my withholding to do it 4 times per tax year and screwed it up due to a fund declared capital gains and dividend being very unexpectedly high.

I was fined by my State $250. + the tax due.

Now I just pay 110% of the previous year tax amount due. It's a safe harbor and easy to calculate.

I could withdraw it all from an IRA at the end of the year in 1 withholding but currently pay it in 4 equal payments from my taxable account.

Seems OP could just do withholding each time IRA money is withdrawn.

 

[TheWizard]

" If you are withholding this doesn’t apply as long as you meet the total amount by year end."

Question, when withholding the taxes for my Roth conversion (done last month), does it add to my total income for the year?

Yes, it does. It also reduces the amount going into your Roth. Many folks prefer to pay the taxes for a Roth conversion from their checking account or taxable investment account...

 

[TheWizard]

Here is what I would do:

A) Estimate "annual cash need from IRA". In January, convert that amount to a Roth IRA.
B) Estimate "income tax withholding need from IRAs". In December, withdraw from IRA and tax withhold that amount. (I just did that last week and 90% of my withdrawal was withheld for income taxes).
C) Withdraw cash from Roth IRA throughout the year.

This works in your younger years but once you hit RMD age you'll have to do something else...

 

[Midpack]

I've never had that happen; but an easy solution is to decrease the final estimated payment on 15 January.

I estimate Fed and state taxes in late Mar, plan on four equal payments, and pay 1st quarter payment in mid April. I start each year with a good idea what my dividends, interest, TIRA distributions, Soc Sec and other incomes sources based on previous year. Then just before the Jun and Sept estimated tax due dates, I recalculate using actual dividends, interest, other income and trim adjust the 2nd and 3rd quarter payments if necessary - it's never significantly different unless I have significantly changed my plans, there's usually no reason to labor over these two payments.

Then in Dec when I know what all my dividends, interest, withdrawals, conversions, cap gains and other taxable income actually were, I then make the final 4th quarter estimated tax payment in mid Jan. If there's a larger $ change, it's always the 4th quarter payment, either up or down - same as Marc suggested.

The first three estimated tax payments don't have to be exactly right. You can make the necessary adjustments for the year with a more precise 4th quarter estimated tax payment - once all the inputs are known. My 4th quarter payment is usually the smallest because I err to the high side on the first three.

If you have trouble estimating what your taxes will be, use a 1040 calculator like 1040 Tax Calculator to get exact numbers.

I pay all our taxes from taxable accounts to preserve what's in our tax deferred and tax free accounts.

 

[audreyh1]

" If you are withholding this doesn’t apply as long as you meet the total amount by year end."

Question, when withholding the taxes for my Roth conversion (done last month), does it add to my total income for the year?

Yes, any withholding is considered part of your withdrawn income. Just because you turned around and immediately sent it to the IRS for withheld taxes doesn’t mean it’s not income.

Same as withheld taxes from a paycheck.

 

[Healthy Lifestyle]

Yes, any withholding is considered part of your withdrawn income. Just because you turned around and immediately sent it to the IRS for withheld taxes doesn’t mean it’s not income.

Same as withheld taxes from a paycheck.

Thanks for the response.
My hesitation is, with additional gross income, I will be bumped from the 22% into the 24% bracket for NJ State taxes.

 

[audreyh1]

At least that’s on the margin - only applies to the last bit of your gross income.

 

[TheWizard]

Thanks for the response.
My hesitation is, with additional gross income, I will be bumped from the 22% into the 24% bracket for NJ State taxes.

Are you sure that New Jersey has 22% and 24% state income tax brackets?

 

[MetalDetectingDonna]

Here is what I would do:

A) Estimate "annual cash need from IRA". In January, convert that amount to a Roth IRA.
B) Estimate "income tax withholding need from IRAs". In December, withdraw from IRA and tax withhold that amount. (I just did that last week and 90% of my withdrawal was withheld for income taxes).
C) Withdraw cash from Roth IRA throughout the year.

That’s an interesting idea. B. When you withdraw cash from your Ira to pay your estimated tax for the year, is that from your Roth Ira or the other Ira? Thank you for your help.