Inadvertent market timing

[skipro33]

On August 15th I took a draw from my tax deferred IRA for $60,000. I'm in the 22% tax bracket and the state and federal tax withholding would be around $19,000 combined. The way quarterly taxes are set up, I would have had to pay it by Sept 15th in order to keep within the quarter. I didn't. The tax penalty was around $150 or so on top of the tax itself. If I paid it now, the penalty would be about $200. But here's the thing; I didn't pay it, the $19K continued to grow as it was all in FXAIX, an S&P index fund. The $19K increased to $20,400, a gain of $1,400. The penalty if paid today would be $220 for a net gain of $1,180. That got me thinking; all the big investment houses are projecting another 5% or more by the end of the year. If that hold true and I continue to delay paying the tax, the growth will net about $1,650 after a penalty that increases to $290. With the projected market growth for the next several months to April 15th, the $19,000 has a good likelihood of reaching $3,100 with a tax penalty of $600 for a net of $2,300.
I never thought about using the tax due on a draw as an investment offset by the penalty, but in this case, so far, I've done that to the tune of $1,140 to date over above the tax penalty.
Has anyone deliberately delayed paying the tax on a withdraw, banking that a bull market would more than offset the penalty?

 

[COcheesehead]

I have withholding done at the time of withdrawal.One less thing to hassle with later.

 

[TheWizard]

On August 15th I took a draw from my tax deferred IRA for $60,000. I'm in the 22% tax bracket and the state and federal tax withholding would be around $19,000 combined. The way quarterly taxes are set up, I would have had to pay it by Sept 15th in order to keep within the quarter. I didn't. The tax penalty was around $150 or so on top of the tax itself. If I paid it now, the penalty would be about $200. But here's the thing; I didn't pay it, the $19K continued to grow as it was all in FXAIX, an S&P index fund. The $19K increased to $20,400, a gain of $1,400. The penalty if paid today would be $220 for a net gain of $1,180. That got me thinking; all the big investment houses are projecting another 5% or more by the end of the year. If that hold true and I continue to delay paying the tax, the growth will net about $1,650 after a penalty that increases to $290. With the projected market growth for the next several months to April 15th, the $19,000 has a good likelihood of reaching $3,100 with a tax penalty of $600 for a net of $2,300.
I never thought about using the tax due on a draw as an investment offset by the penalty, but in this case, so far, I've done that to the tune of $1,140 to date over above the tax penalty.
Has anyone deliberately delayed paying the tax on a withdraw, banking that a bull market would more than offset the penalty?

I think Marko does that routinely...

 

[Koolau]

I'd never even thought of it but I guess we should think of it.

 

[Out-to-Lunch]

all the big investment houses are projecting another 5% or more by the end of the year.

Really?

 

[skipro33]

Really?

JPMorgan, Morgan Stanley, Wells Fargo, HBSC, etc. all calling for 7800 by the end of the year. Others as much as 8000.

 

[TheWizard]

JPMorgan, Morgan Stanley, Wells Fargo, HBSC, etc. all calling for 7800 by the end of the year. Others as much as 8000.

Three cheers for 8000!!!

 

[Koolau]

Three cheers for 8000!!!

I'll believe it if you will.

 

[TheWizard]

I'll believe it if you will.

S&P 500 is 6849 now.
Getting to 8000 by New Year's is almost a 17% gain, not very likely.

I'll be happy if it gets to 7000+...

 

[skipro33]

Here's something interesting: I won't have to pay any penalty. Here's why; something called, "safe-harbor". Safe-Harbor means that if I made under $150K last year, (My AGI was $124,655) and I paid 100% of last year's taxes by the end of this year, (I paid $10,621 last year and already have paid $11,484 this year to date). Then there is no underpayment penalty applied for 2025.
By exceeding last year’s liability with my 2025 payments, I've locked in safe‑harbor protection. The IRS won’t assess underpayment penalties, even though the $60K draw wasn’t prepaid.
My $19,000 in taxes on that $60,000 draw has so far earned to date $1,045. I owe no penalty for not paying the tax when the draw was taken or within the quarter. I will owe no penalty if I wait to pay it when I file by April 15th as well.

 

[TheWizard]

Here's something interesting: I won't have to pay any penalty. Here's why; something called, "safe-harbor"...

Yes, most of us are aware of safe harbor rules.
But mine would be 110% of last year's and I'm not fond of over paying taxes...

 

[audreyh1]

I just use the safe harbor rules.

I don’t have to worry about paying extra ahead on unexpected additional income.

I can also tell by December or early January if I might be over paying and I switch to the current year safe harbor rule.

 

[skipro33]

S&P 500 is 6849 now.
Getting to 8000 by New Year's is almost a 17% gain, not very likely.

I'll be happy if it gets to 7000+...

All the big banks — JPMorgan, Morgan Stanley, Deutsche Bank, and BofA — are now calling for the S&P to finish the year at or above 7,200. That’s a pretty bold stance considering where we were just a few months ago.

The common thread in their reasoning is this idea of an “AI supercycle” driving productivity and earnings, plus the Fed easing rates which gives valuations more room to run. Morgan Stanley is even talking about 7,800 in 12 months, while Deutsche Bank and JPMorgan are both floating numbers closer to 8,000 by 2026. Bank of America is a little more conservative, but still sees us in the 6,700–7,000 range by year‑end.

So the consensus is clear: they’re betting on strong earnings, AI spending, and a friendlier Fed to keep the rally alive.

I can certainly relate to questioning how much of this is realistic versus just Wall Street optimism.
So, do you buy into the AI supercycle ideal, or think they are overshooting what earnings can actually deliver? I'm positioned for 7,200.

 

[TheWizard]

...So, do you buy into the AI supercycle ideal, or think they are overshooting what earnings can actually deliver? I'm positioned for 7,200.

I'm a buy & hold investor, 95% in stock funds.
So I'll take whatever comes.
If there's a correction/crash, I'll try to TLH in my taxable account.

It'll work out either way...

 

[Mr. Tightwad]

I'll take the under on 8,000.

 

[Koolau]

I'll take the under on 8,000.

Very courageous.

 

[yakers]

AFAIK ( I only did it once, so not an expert) one can send their RMD to pay tax any time (inclluding later in the year) and there is no late penalty.

 

[Exchme]

Don't pay a penalty, use high withholding on a withdrawal from a retirement account and then an indirect rollover back to the retirement account from taxable. You are allowed to do an indirect rollover (paying back your retirement account) once in 365 days. The money that came from the retirement account goes to the IRS via withholding, so there is no penalty. Since stocks go up over the course of a year more often than they go down, that allows you to keep the money invested during the year and clean up your tax liability in December. Lots of threads about the technique both here and at bogleheads.org.

 

[TheWizard]

Don't pay a penalty, use high withholding on a withdrawal from a retirement account and then an indirect rollover back to the retirement account from taxable. You are allowed to do an indirect rollover (paying back your retirement account) once in 365 days. The money that came from the retirement account goes to the IRS via withholding, so there is no penalty. Since stocks go up over the course of a year more often than they go down, that allows you to keep the money invested during the year and clean up your tax liability in December. Lots of threads about the technique both here and at bogleheads.org.

I'm aware of that scheme but why in the world would you want even more money in tax-deferred?
I spent a good decade trying to get it OUT of tax-deferred...

 

[Route246]

On August 15th I took a draw from my tax deferred IRA for $60,000. I'm in the 22% tax bracket and the state and federal tax withholding would be around $19,000 combined. The way quarterly taxes are set up, I would have had to pay it by Sept 15th in order to keep within the quarter. I didn't. The tax penalty was around $150 or so on top of the tax itself. If I paid it now, the penalty would be about $200. But here's the thing; I didn't pay it, the $19K continued to grow as it was all in FXAIX, an S&P index fund. The $19K increased to $20,400, a gain of $1,400. The penalty if paid today would be $220 for a net gain of $1,180. That got me thinking; all the big investment houses are projecting another 5% or more by the end of the year. If that hold true and I continue to delay paying the tax, the growth will net about $1,650 after a penalty that increases to $290. With the projected market growth for the next several months to April 15th, the $19,000 has a good likelihood of reaching $3,100 with a tax penalty of $600 for a net of $2,300.
I never thought about using the tax due on a draw as an investment offset by the penalty, but in this case, so far, I've done that to the tune of $1,140 to date over above the tax penalty.
Has anyone deliberately delayed paying the tax on a withdraw, banking that a bull market would more than offset the penalty?

The term deliberate is departing what the IRS views as negligent. At some point it might descend to fraudulent. Just be aware of the difference. Negligence is usually forgiven with penalties and interest. Fraud is treated differentlyl.

 

[skipro33]

The term deliberate is departing what the IRS views as negligent. At some point it might descend to fraudulent. Just be aware of the difference. Negligence is usually forgiven with penalties and interest. Fraud is treated differentlyl.

What I’m doing is not fraud. The IRS makes a clear distinction between negligence (late or missed estimated payments) and fraud (intentional concealment or misrepresentation). In my case, I’m not hiding income or falsifying anything — I’m simply not prepaying, but instead paying the tax at filing.

The safe‑harbor rules apply: since my AGI last year was under $150K and I’ve already paid in more than 100% of last year’s liability, I’m protected from underpayment penalties. That means the IRS won’t assess penalties even though the $60K draw wasn’t prepaid quarterly.

This is just using the safe‑harbor provision as intended. The IRS only treats it as fraud if someone is deliberately trying to evade or conceal taxes, which isn’t the case here.

 

[Exchme]

I'm aware of that scheme but why in the world would you want even more money in tax-deferred?
I spent a good decade trying to get it OUT of tax-deferred...

The maneuver does not change the amount in tax-deferred, it takes from a retirement account for paying taxes via withholding and replenishes the retirement account from taxable. You can even do it from a Roth, which is how I will be doing it this week.

It is better than paying quarterly in that your money works for you most of the year and better than paying late penalties as it just takes a little work. If you prefer to pay the penalties, then we thank you for your extra contribution to the federal treasury.

The final step in the dance is that when the money is returned to the retirement account, you must check the box that tells them that this is a rollover from an IRA or employer sponsored retirement account - that's what tells them that this is an indirect rollover and not an excess contribution.

I use Vanguard and they have two points where they handle things a bit oddly. Not sure about other brokerages.
*You must first sell in the retirement account and use the retirement account's settlement fund as the source of the withholding.
*You cannot use the settlement fund in a Vanguard joint taxable account as the source of funds to replenish the retirement account, you need to either use a taxable account that's in your name only or use an external bank account (which can be joint).

 

[kilgore]

Gosh. The investment houses say so and so.

 

[HappilyRetired]

On August 15th I took a draw from my tax deferred IRA for $60,000. I'm in the 22% tax bracket and the state and federal tax withholding would be around $19,000 combined. The way quarterly taxes are set up, I would have had to pay it by Sept 15th in order to keep within the quarter. I didn't. The tax penalty was around $150 or so on top of the tax itself. If I paid it now, the penalty would be about $200. But here's the thing; I didn't pay it, the $19K continued to grow as it was all in FXAIX, an S&P index fund. The $19K increased to $20,400, a gain of $1,400. The penalty if paid today would be $220 for a net gain of $1,180. That got me thinking; all the big investment houses are projecting another 5% or more by the end of the year. If that hold true and I continue to delay paying the tax, the growth will net about $1,650 after a penalty that increases to $290. With the projected market growth for the next several months to April 15th, the $19,000 has a good likelihood of reaching $3,100 with a tax penalty of $600 for a net of $2,300.
I never thought about using the tax due on a draw as an investment offset by the penalty, but in this case, so far, I've done that to the tune of $1,140 to date over above the tax penalty.
Has anyone deliberately delayed paying the tax on a withdraw, banking that a bull market would more than offset the penalty?

I never thought of this! The downside could be the market turns and the gain is t there but the penalty is. But it all makes sense to me if it was just in an interest bearing account. But you invested in FXIAX so that is more risky, but also it turns out to be great for you! Merry Christmas and happy Hanukkah