IRA Draw Methods

[RetireBy90]

Hello to everyone. I will be retired tomorrow and have funded my living expenses through the end of this year with after tax funds. Starting next year I will start the draw from IRAs and I am trying to plan some of the details. I would appreciate any experience or comments.

Do you take a draw once a year and move to checking, once a quarter, or monthly ?

I will be required to pay taxes on the draw. If I take a draw in January, do I need to make the estimated tax payment in first quarter or can I spread it over 4 quarterly payments ?

I always did my IRA contributions early January to get a year's worth of earnings tax advantaged. Do you wait till the end of the year for a draw for the same reason ? Say I could take a draw in Dec or Jan for the next year, does it make a difference ? I have always taken mom's RMD in Dec to keep as much in the tax deferred as long as possible, but this is a bit different in that I'm only talking about one extra month not a year. I know taxes and other factors will also impact somewhat, but trying to get a baseline to judge from.

Thanks in advance

 

[bingybear]

not enough info --If you take the withdraw early in the year with withholding, do you need to do estimated? Does the withholding cover your tax obligation? If not, then you likely do need estimated.

When to take the distribution? - waiting until the end of the year can be a benefit... or not. What happens if the investment goes down during the year. I don't expect to take withdraws (other than roth conversions) until RMD time. When you take them is up to you. Some like it monthly so it is like a pay check, some annually because they like it or spending is lumpy. I expect at RMD time I will pull the bulk at one time and leave some for QCDs.

 

[kaneohe]

You do not need to have withholding from the IRA withdrawal. Ask your custodian. You should be able to opt out w/ written consent if you wish.

If you are using the IRA funds to live on/spend, you might consider where they are invested in the IRA. Perhaps consider having a source of more stable funds for withdrawal within the IRA so you don't deplete the IRA too much if the market is down. If you are just going to reinvest the withdrawn funds , this is less important............but why would you be withdrawing funds if you are going to just reinvest, unless to do Roth conversion.

Learn about the safe harbor rules for taxes. How Much to Pay
If you pay estimated tax, it is simplest to pay in 4 equal "quarterly" payments.
You can elect to treat withholding as paid when withheld but you must then fill out F2210 and save proof of the withholding date and check that election option on the form. otherwise any withholding will be treated as paid in equal "quarterly" payments........beneficial, if you pay later.

When to withdraw......early or late in yr., when market is high or low.....that is kind like asking when to take SS.....at age 62 or 70. Makes for interesting and eternal discussion. If you leave it for later for growth, if growth occurs at all,
you are taxed at ordinary income rates. If you can grow it outside in taxable account or Roth, you could be taxed at more favorable rates but need to take into account tax considerations on how much is invested.

Enjoy your retirement!

 

[LOL!]

If I was in your shoes, I would withdraw monthly as needed.

 

[RetireBy90]

not enough info --If you take the withdraw early in the year with withholding, do you need to do estimated? Does the withholding cover your tax obligation? If not, then you likely do need estimated.
When to take the distribution? - waiting until the end of the year can be a benefit... or not. What happens if the investment goes down during the year. I don't expect to take withdraws (other than roth conversions) until RMD time. When you take them is up to you. Some like it monthly so it is like a pay check, some annually because they like it or spending is lumpy. I expect at RMD time I will pull the bulk at one time and leave some for QCDs.

I'll be indluding an amount to account for taxes due probably at 20% rather than have Fido withold from distribution. Guess my question here was more do my estimated obligations to IRS every quarter need to match the quarter's income or do all 4 quarterly payments to IRS need to be within the 90% of tax due ?

Learn about the safe harbor rules for taxes. How Much to Pay
If you pay estimated tax, it is simplest to pay in 4 equal "quarterly" payments.
Enjoy your retirement!

Won't be able to use safe harbor for 2019 as my 2018 income includes my salary from the job. If I paid the same as due in 2018 I would grossly over withhold.
Thanks for the link to Fairmont, confirmed what I suspected about estimated payments. Mine should be simple, take 2018 form 1040 and remove salary, add in amount I'll draw from IRA and I'll have a taxable number. Then lookup the tax due and what the marginal rate is. I can send in a check for the marginal percentage of my draw.
Guess I was also looking for any experienced and how they take the draw(s) each year
Thanks

 

[kaneohe]

..........................
Won't be able to use safe harbor for 2019 as my 2018 income includes my salary from the job. If I paid the same as due in 2018 I would grossly over withhold.

Thanks for the link to Fairmont, confirmed what I suspected about estimated payments. Mine should be simple, take 2018 form 1040 and remove salary, add in amount I'll draw from IRA and I'll have a taxable number. Then lookup the tax due and what the marginal rate is. I can send in a check for the marginal percentage of my draw.
....................................

When your income goes down, the safe harbor is 90% of current yr.

Not sure what you mean by the last sentence.....once you know the tax due,
you should for simplicity send in 25% of the tax each quarter. You can also pay based on how much you withdraw each quarter (lumpy) but then have to deal with F2210 Sch AI at the very end of F2210.......lots of fun if you enjoy that kind of stuff.

 

[RetireBy90]

When your income goes down, the safe harbor is 90% of current yr.

2019 will not have any salary and no withholding, so to use 90% would be a gross over payment I don't want to do.

Not sure what you mean by the last sentence.....once you know the tax due,
you should for simplicity send in 25% of the tax each quarter. You can also pay based on how much you withdraw each quarter (lumpy) but then have to deal with F2210 Sch AI at the very end of F2210.......lots of fun if you enjoy that kind of stuff.

Thanks for the feedback, my last sentence I mean to say, I'll take 2018 tax forms, deduct my salary and add in 1099R for IRA draw and should be able to get a good approximation of my total income and look up the marginal tax rate that will apply to my IRA draw.

 

[candrew]

We are 21 months into our retirements. tIRA withdrawals are taken monthly on the 15th. Our pension direct-deposits post on the 1st of each month. This mimics our pay cycles during the days of wage slavery.

Estimated taxes on the IRA withdrawals we handle quarterly through the EFTPS.

That's our strategy and so far, it works well for us. Easy-peezy.

 

[kaneohe]

2019 will not have any salary and no withholding, so to use 90% would be a gross over payment I don't want to do.

Thanks for the feedback, my last sentence I mean to say, I'll take 2018 tax forms, deduct my salary and add in 1099R for IRA draw and should be able to get a good approximation of my total income and look up the marginal tax rate that will apply to my IRA draw.

90% safe harbor means 90% of the tax for the tax yr in question (2019). 100 (110)% safe harbor means 100(110)% of the tax for the prior yr (2018).

I understood no w/h on IRA withdrawal. Also no w/h on any other income?
If so then your estimated payments need to account for all income. If you know total tax for 2019, you pay 25% of total each quarter for the easiest process.

Perhaps you mean you will pay estimated tax on other income in equal quarterly payments based on that other income alone. Then you will pay additional estimated taxes on IRA based on marginal rates based on when you take the IRA withdrawal. Lumpy payments are ok too but you will have to deal with the annualized income reporting of F2210. Fun for some but not for all.

 

[NW-Bound]

I withdraw as needed. Just did one right before making this post.

Just a few clicks, and my deferred-tax account instantaneously went down $10K, while my checking account at the same institution went up by $8,800. The difference is due to "transaction friction".

PS. I do not make quarterly tax payments, but use tax withholding. At the end of December, when I have more info on the total income and the tax due on it, I adjust the withholding on the last withdrawal to square things up.

 

[bingybear]

2019 will not have any salary and no withholding, so to use 90% would be a gross over payment I don't want to do.

Thanks for the feedback, my last sentence I mean to say, I'll take 2018 tax forms, deduct my salary and add in 1099R for IRA draw and should be able to get a good approximation of my total income and look up the marginal tax rate that will apply to my IRA draw.

When we RE DW had a vacation pay out and I had a couple of months of employment. I asked on a financial board (not ER) and many said to pay 100% of last years. Like you I thought that was way too much. What I did was use my estimate and increased it a bit. In the end my estimate was pretty accurate. I did pay the estimated taxes all in the first quarter just because I didn't care to deal with sending in more payments.

Now I do roth conversions in December so I just pay 1 payment the equals last years tax. So far that has worked fine, however I'm thinking my roth conversion will be much larger and I may pay more estimated taxes.

If you are confident in your tax estimate, then just pay that amount in quarterly installment (IRS dates) using 25% payments. You can always pay earlier if you choose to.


What I did has nothing to do with tIRA withdraws, but that should not complicate anything appreciably

 

[kgtest]

I withdraw as needed. Just did one right before making this post.

Just a few clicks, and my deferred-tax account instantaneously went down $10K, while my checking account at the same institution went up by $8,800. The difference is due to "transaction friction".

PS. I do not make quarterly tax payments, but use tax withholding. At the end of December, when I have more info on the total income and the tax due on it, I adjust the withholding on the last withdrawal to square things up.

This is what my plan will be until I get too lazy. Then I will just do one/two withdrawal based on historically the first and second strongest months of returns that I've had, or adversely be sure I don't take it during the two worst months of my historical returns. Also one reason why I keep track month to month what my return was, so I can look back later and have some data to use for this strategy.



Maybe it'll change 18 years from now when I actually need to take a withdrawal, maybe not.



For instance if I see a trend that the last 20 years of returns were highest in February followed by August, then that's when I'll take em.

 

[NW-Bound]

This is what my plan will be until I get too lazy. Then I will just do one/two withdrawal based on historically the first and second strongest months of returns that I've had, or adversely be sure I don't take it during the two worst months of my historical returns. Also one reason why I keep track month to month what my return was, so I can look back later and have some data to use for this strategy.

I never have to sell anything to support my WR, the reason being I always hold so much cash. Right now, I am holding close to 30% cash, while my WR in the last 12 months is only 2.2% of current portfolio.

My trading decisions have never been influenced by my immediate need to withdraw.

Maybe it'll change 18 years from now when I actually need to take a withdrawal, maybe not.

That's a long time. Maybe by then, they already rule out IRA and 401k, and everything has to be turned over to the government to put in the "lock box".

 

[Independent]

We take money "as needed", no particular schedule.

We were not "spend every dollar in the checking account" people when I was working, so no point in setting up a schedule in retirement.


I maintain an estimated tax worksheet. Each time I do a withdrawal, I look at the worksheet and determine how much tax I'd like to withhold. No quarterly estimates.

 

[GravitySucks]

First few years i took a fixed amount every quarter. It was from a 401k so Fido had to withhold 20% for everyone's favorite Uncle.
Now I take out what I need as I need and have Fido withhold a bit for that Uncle and Prince Andy.

 

[deserat]

I maintain an estimated tax worksheet. Each time I do a withdrawal, I look at the worksheet and determine how much tax I'd like to withhold. No quarterly estimates.

This - but from a different perspective. I have a consulting business and keep track of all of my income and outgo. The spreadsheet I have also has an estimated tax calculation for each quarter. I pay tax on what I get paid, not on what is estimated. At the end of the year (15 Jan estimated tax payment date) I finish up all of the numbers and then play around with the SEP IRA and other things to optimize my tax rate and then send off the final check. Actually, I do this calculation/etc in December. For 15 April, I do all the paperwork early and if I owe money, I pay it on 15 April. If I'm owed money I submit early. I've never been 100% correct, however, usually I owe them a smidgeon, which is fine with me as I'm not interested in giving the government an interest fee loan.

LSS: it's easy to track it and adjust your tax payment based on the situation.