Estimated Taxes - Paying Quarterly vs Withholding

[LastOfTheBoomers]

I’m going to start my small pension that I earned from my first job - it has never really been part of my planned income since it was pretty small - currently I pay quarterly Estimated taxes (like most of us I’m sure)

If I withhold about 90% of my pension and pay the IRS I won’t have to write the IRS any more checks - the only drawback is that I’m loosing some interest on the pension money (if I deposited it then paid quarterly)

My investments are in set it and forget it mode - so no large swings - very predictable. If I do have a large capital gain - I know I can always write a check.

Anyone else do this?

 

[Ronstar]

DW has fed tax taken from her pension. But not enough withheld to eliminate the need for quarterlies. Never thought about it, but withholding enough from pensions to avoid quarterlies seems like a viable option.

 

[Out of Steam]

The only income stream we receive that doesn’t have withholding taxes taken out is my wife’s Social Security. I began paying tax from my Social Security at the middle of last year.

So far, the payments from TIAA that have mandatory 20% withholding have made up any shortfall. Even with a couple of those phasing out, with the new tax deductions for people over 65, we’ll continue to be OK.

 

[G-Man]

DW and I decided not to take any withholdings from our retirement income sources (pension, SS, etc.) throughout the year, but rather take a one-time distribution in December from our tax-deferred account and have all the distribution withhold for federal and state taxes owed for the year. This strategy has been discussed on this forum many times. When you do this, the withholdings are considered timely and proportional just like you were making quarterly payments to the IRS.

This strategy does require you to have a good handle on what your federal and state income taxes will be for the year. However, there are many tax calculators out there that can help you estimate your taxes for the year. Last year was our first year to implement this strategy. I will see how close I came to estimating my taxes owed when I file my taxes next month.

 

[COcheesehead]

We withhold. It’s automatic, it’s easy.
I run Dinkytown mid year just as a checkpoint, but so far we’ve been pretty accurate with it.

I used to do withholding from an RMD from an inherited IRA at year end, but that account now is down to a very small amount and our regular RMDs are 10-12 years away.

 

[fosterscik]

We don't do any withholding (regular payments are all from DW: SS and pension ). I find it much easier to make 4 equal quarterly payments equal to 100% of the prior year's Federal tax.

 

[FlaMariner]

but rather take a one-time distribution in December from our tax-deferred account and have all the distribution withhold for federal and state taxes owed for the year.

+1

We've been doing this since turning 59.5. We send to Uncle Sam from our IRA as close to 12/31 as is practical.

We get to keep our money all year and at the end of the year, we are better qualified to guess the appropriate amount of money to turn over to the government.

 

[G-Man]

+1

We've been doing this since turning 59.5. We send to Uncle Sam from our IRA as close to 12/31 as is practical.

We get to keep our money all year and at the end of the year, we are better qualified to guess the appropriate amount of money to turn over to the government.

If you have a 401k and your plan allows the "Rule of 55", you should be able to take a distribution from your 401k before 59 1/2 without incurring a 10% early withdrawal penalty.

 

[pb4uski]

I used to have federal tax withholdings from my pension, but now I just do an estimate of our taxes in December each year and a tIRA withdrawal with 99% federal income tax withholding to prepay the taxes.

The IRS considers withholdings to have been done evenly throughout the year no matter when during the year they are actually done, so for underpayment penalty purposes there is no difference between $500 withheld on the first of each month for January through December or $6,000 withheld on December 31st. You need to be 59-1/2 or older to avoid the early withdrawal penalty.

 

[sengsational]

^ This is my MO as well.

I don't like to have a slew of Me > IRS transactions.

IRS is yet another "account"; they hold my money while later my tax liability is calculated and they pay taxes out of that account.

Having one transaction means easy math, as opposed to having dozens of payments from various places. The OCD in me would require I at least record all of the transactions and do a report that aligns with what the IRS says they collected. Is the IRS going to rip me off? No, but I'm pretty sure I couldn't help myself.

 

[Sunset]

We have taxes withheld throughout the year from a few small income sources, and make quarterly payments.

We don't use the method of pay via IRA withdrawal and withhold taxes method, as this would add to our taxable income and we want to leave room for Roth conversions.
The other issue for this method is a surprise giant fund declaration of capital gains/dividend. This is less possible for us now but in the past one year we had a surprise end of year $70K declaration of unexpected income. It would have been awful to have needed to also do an IRA withdrawal at that point for taxes.

 

[imjustawarrior]

I have a goal to never pay estimated taxes.

We are too young for SS and have no pensions. I use withholding on Roth conversion and a 60-day rollover to make the conversion whole. In my perspective, there are too many ways to do withholding to ever need to do estimated taxes. Withholding seems easier than having to make quarterly payment for fed and state taxes. I can make my tax payment at the end of the year to meet safe harbor.

 

[OldShooter]

DW and I decided not to take any withholdings from our retirement income sources (pension, SS, etc.) throughout the year, but rather take a one-time distribution in December from our tax-deferred account and have all the distribution withhold for federal and state taxes owed for the year. This strategy has been discussed on this forum many times. When you do this, the withholdings are considered timely and proportional just like you were making quarterly payments to the IRS.

This strategy does require you to have a good handle on what your federal and state income taxes will be for the year. However, there are many tax calculators out there that can help you estimate your taxes for the year. Last year was our first year to implement this strategy. I will see how close I came to estimating my taxes owed when I file my taxes next month.

WADR you don't need "a good handle" at all. You just need to understand the safe harbor rules.

 

[Cobra9777]

We have 2 pensions, taxable SS, dividends, Roth conversions, and some hobby income. We do no withholding and make no quarterly estimated payments.

Like others, each December I withdraw our safe-harbor amount from a tIRA with 100% withholding. In January, I repay the IRA from taxable funds and code it as a 60-day rollover, making the IRA distribution non-taxable.

In effect, we use taxable funds to pay last year’s taxes each January. The IRS treats the withholding as if it occurred evenly throughout the year, eliminating under-withholding concerns and Form 2210. The process is simple and cash-flow friendly.

To avoid the once-per-year rollover limit, I alternate between my IRA and DW's IRA. I’ve used this approach for many years, after learning about it here. There’s also no under-59½ penalty if the rollover is completed properly.

 

[Texas Proud]

Like some have said... do withholding... easier...

True up at end of year with an IRA distribution that you pay 100% for taxes... AND, I found out that you can do that from a ROTH..

 

[audreyh1]

We have 2 pensions, taxable SS, dividends, Roth conversions, and some hobby income. We do no withholding and make no quarterly estimated payments.

Like others, each December I withdraw our safe-harbor amount from a tIRA with 100% withholding. In January, I repay the IRA from taxable funds and code it as a 60-day rollover, making the IRA distribution non-taxable.

In effect, we use taxable funds to pay last year’s taxes each January. The IRS treats the withholding as if it occurred evenly throughout the year, eliminating under-withholding concerns and Form 2210. The process is simple and cash-flow friendly.

To avoid the once-per-year rollover limit, I alternate between my IRA and DW's IRA. I’ve used this approach for many years, after learning about it here. There’s also no under-59½ penalty if the rollover is completed properly.

The alternating between spouses accounts is very smart!

 

[Jerry1]

We don't do any withholding (regular payments are all from DW: SS and pension ). I find it much easier to make 4 equal quarterly payments equal to 100% of the prior year's Federal tax.

Same. I’d rather handle the quarterly payments and not have to manage my withholdings. The method the OP describes is fine and will work best as long as income stays steady but I prefer to just forgo any withholding and deal with the quarterly payments.

 

[audreyh1]

Same. I’d rather handle the quarterly payments and not have to manage my withholdings. The method the OP describes is fine and will work best as long as income stays steady but I prefer to just forgo any withholding and deal with the quarterly payments.

Same here, especially since we don’t currently have (hardly) anything to withhold from.

Once we are in RMD territory we may find it more convenient to use IRA withholding near the end of the year. We plan to use QCDs as well, so it will be a balancing act.

 

[Koolau]

I’m going to start my small pension that I earned from my first job - it has never really been part of my planned income since it was pretty small - currently I pay quarterly Estimated taxes (like most of us I’m sure)

If I withhold about 90% of my pension and pay the IRS I won’t have to write the IRS any more checks - the only drawback is that I’m loosing some interest on the pension money (if I deposited it then paid quarterly)

My investments are in set it and forget it mode - so no large swings - very predictable. If I do have a large capital gain - I know I can always write a check.

Anyone else do this?

Basically, yes. We "over-pay" some things to insure we don't need to file quarterlies. It costs us some money as you point out (like interest) but I think of it as paying for peace-of-mind and relieving ourselves of "one more thing."

 

[Koolau]

Like some have said... do withholding... easier...

True up at end of year with an IRA distribution that you pay 100% for taxes... AND, I found out that you can do that from a ROTH..

Please explain this more fully. Why would you use Roth money and what are the details, please?

 

[G-Man]

WADR you don't need "a good handle" at all. You just need to understand the safe harbor rules.

Please explain the safe harbor rules. For example if my federal taxes owed last year was $10,000, what would be the safe harbor amount for 2026?

Correction.. $10,000 in taxes in 2025

 

[Golden Mean]

I pay estimated Fed taxes once, in March typically. My taxes are very low, so it's easier to just pay the one time. I'll note that I don't "sent them a check". One can pay through the IRS site, either with a login (account) or without. Takes 5 mins.

 

[audreyh1]

Please explain the safe harbor rules. For example if my federal taxes owed this year was $10,000, what would be the safe harbor amount for 2026?

The safe harbor rules are (off the top of my head):

• Pay $2500 each tax quarter due Apr 15, June 15, Sept 15 and Jan 15. If your 2025 AGI was > $150K MFJ then payments would be $2750.
• Use the annualized income method to determine taxes due each tax quarter based on YTD 2026 income earned thru Mar 31, May 31, Aug 31 and Dec 31. This method is not easily summarized. You need to learn how to do various annualized calculations as explained in the estimated taxes IRS publication 505 for 2026. This usually requires filing form 2210 with your tax return to show when income was received to avoid penalty.
• Pay estimated taxes in equal payments that will meet your 90% tax obligation for 2026. This implies you know almost exactly your 2026 income annd taxes due already - not possible for many.
• Owe less than $1000 in taxes for 2026. Unlikely for most.

 

[G-Man]

The safe harbor rules are (off the top of my head):

• Pay $2500 each tax quarter due Apr 15, June 15, Sept 15 and Jan 15. If your 2025 AGI was > $150K MFJ then payments would be $2750.
• Use the annual income method to determine taxes due each tax quarter based on 2026 income. This is not easily summarized. You need to learn how to do various annualized calculations as explained in the estimated taxes IRS publication 505 for 2026.
• Pay estimated taxes in equal payments that will meet your 90% tax obligation for the year. This implies you know almost exactly your 2026 income already - not possible for many.
• Owe less than $1000 in taxes for 2026. Unlikely for most.

I have a good idea on what my 2026 AGI and taxable income is already.

 

[audreyh1]

I have a good idea on what my 2026 AGI and taxable income is already.

So you don’t have interest income or investment income that varies year to year? Or sell a property? Or decide to sell some stock or make an extra IRA withdrawal?

The estimated taxes IRS publication 505 is not yet available, but will be well before April 15 when the first estimated tax payment is due for 2026. By Mar 31 hopefully the online tax calculators will be updated for 2026 and you can use that and divide by 4, or use the 2025 tax paid amount if it is less. Just keep in mind the AGI > $150K rule which requires you to multiply your 2025 taxes by 110% and then divide by 4 to get your estimated tax payments for 2026.

The reason people often use the prior year taxes safe harbor rule is because it doesn’t require you to know anything about the current year income, or tax calculations, etc., easy to calculate and safe.