Logistics question on IRA withdrawals

[SecondAttempt]

I basically retired at the end of 2024. I say "basically" because I am still supporting my old organization at the level of a few hours per week. Nice beer money and since my expenses are minimal, I don't expect to need to start making IRA withdrawals until mid 2025 except possibly to cover a big trip in April/May. But even that I think I can cover with what I have and the beer money I expect.

My question is about logistics. Once I start making IRA withdrawals, how does it work for taxes? My money is (or will be) with a major mutual fund company (T. Rowe Price) and I think they can withhold taxes and set up monthly or quarterly automatic withdrawals (but I need to check on that.) Is it best to set up automatic periodic withdrawals or to withdraw as needed. My needs will be very lumpy as my routine expenses are relatively minimal and the big expenses will be for travel a few times per year.

For taxes, I have paid estimated taxes in the past and I am admittedly not great at it. I've often forgotten a payment and paid a small penalty. It's never been enough to make me change my ways and pay more attention to deadlines. For the record, when I had to pay quarterly business taxes for rentals I was always on top of it so maybe I will be better about quarterly taxes in retirement if I take that route.

I'm interested in how everyone handles these logistics. I use an enrolled agent for taxes and will be soliciting her advice as well.

 

[rk911]

As far as quarterly taxes are concerned we've been scheduling them on EFTPS.GOV for years. We use the Safe Haven method..no worries, no stress, EZ PZ.

EFTPS.GOV

 

[pb4uski]

I'll tell you what I would do in your situation. I would take withdrawals during the year for spending money as needed. Then in mid-December I would sketch out my taxes and do an additional withdrawal for the estimated taxes with 100% withholding.

On thing to keep in mind is that the withdrawal for withholding will also be taxable, so you need to gross up the withdrawal for the additional tax but that is easy.

An example using IRS & State Tax Calculator | 2005 -- 2025

MFJ both over 65 and $100,000 of withdrawals were made for spending. Federal tax is $7,551 and taxable income of $66,900 is in the 12% tax bracket.

For the withdawal for taxes, I need to withdraw $7,551/(1-12%) or $8,581 and have 100% federal tax withholding.

After that withdrawal, total income is $108,581 and tax is $8,581 and withholding is $8,581 so tax due is $0. Even though the withdrawal with withholding is done in December, for the purpose of timely payment, the IRS considers any withholding as having been done evenly throughout the year.

However, given that you are newly retired, you may be in the sweet spot to do low tax cost Roth conversions and if so that would change the calculations a bit but there isn't enough information to go on.

 

[FlaGator]

If your cash needs are lumpy, I would take it as needed and not worry about scheduled periodic withdrawals.

I project taxable income at the start of the year, and update as the money moves in and out. If you do something similar, you can have TRP withhold as you request along the way and not worry about quarterly estimated payments - they would be doing that for you.

And PB just showed you the tool and math to do that.

 

[Morgan22]

I would do the same as FlaGator suggests. Especially since your expenses are lumpy and you've said you've forgotten in the past to pay estimated taxes on time. Just withdraw when needed and have them withhold at withdrawal time. That way you only have to worry about settling up by tax deadline the following year.

Before you do auto withholding though, check out the link pb4uski posted to get an idea of what you may owe for the year. It is a great simple tool to use for rough estimates. I found that the first 2 years we had really low income we didn't owe any federal taxes at all, we just owed a few dollars to the state. We didn't need to have any withholdings done on our withdrawals those 2 years.

 

[audreyh1]

You don’t have to set up any IRA withdrawal schedule, you can draw whenever you need.

Some folks also start doing Roth conversions based on their tax or ACA/IRMAA situation each year.

And you can withhold taxes or pay estimated taxes separately. It’s a good idea to do some tax planning in advance each year to figure out what works best for you.

 

[G-Man]

I'll tell you what I would do in your situation. I would take withdrawals during the year for spending money as needed. Then in mid-December I would sketch out my taxes and do an additional withdrawal for the estimated taxes with 100% withholding.

On thing to keep in mind is that the withdrawal for withholding will also be taxable, so you need to gross up the withdrawal for the additional tax but that is easy.

An example using IRS & State Tax Calculator | 2005 -- 2025

MFJ both over 65 and $100,000 of withdrawals were made for spending. Federal tax is $7,551 and taxable income of $66,900 is in the 12% tax bracket.

For the withdawal for taxes, I need to withdraw $7,551/(1-12%) or $8,581 and have 100% federal tax withholding.

After that withdrawal, total income is $108,581 and tax is $8,581 and withholding is $8,581 so tax due is $0. Even though the withdrawal with withholding is done in December, for the purpose of timely payment, the IRS considers any withholding as having been done evenly throughout the year.

However, given that you are newly retired, you may be in the sweet spot to do low tax cost Roth conversions and if so that would change the calculations a bit but there isn't enough information to go on.

View attachment 54274
View attachment 54275

Definitely a post that I will earmark for future reference. Thank you so much.

 

[Gumby]

You don’t have to set up any IRA withdrawal schedule, you can draw whenever you need.

Some folks also start doing Roth conversions based on their tax or ACA/IRMAA situation each year.

And you can withhold taxes or pay estimated taxes separately. It’s a good idea to do some tax planning in advance each year to figure out what works best for you.

I do my Roth conversions in December so that I can fine tune the amount as necessary to keep my AGI and taxable income where I need them to be.

 

[sengsational]

The way I have been doing it is like Gumby. I buy the tax software on black Friday, and then in December, do my taxes with estimates, entering all of the existing IRA withdrawals. Then I construct a year-end withdrawal to tune against marginal tax rate, IRMAA, ACA, etc. Within that withdrawal, I set the withholding percentages to pay state and federal taxes such that I owe about $100 each. Sometimes those percentages are huge (most of the withdrawal goes to the government). The challenge for you is that in order to get estimates entered properly when you don't have the previous year withdrawal forms to see how it's reported. For instance, IRA withdrawals' 1099 usually have box 7 has a "7" and IRA/SEP/SIMPLE box checked. Just come on here and ask when the time comes to make sure.

 

[RetireBy90]

Lots of different ways to work your draws. I had a problem with lumpy income first 2 years of retirement with DW started a small pension and started SS and I got busy doing Roth conversions. Now income has settled down and easier to project. I have a max TIRA draw number to start the year and take draws as needed. I find it easier to have taxes withheld from the draw than to catch up at the end of the year. It also helps me to see the true cost of the draw. I have 26% withheld for Fed and state, so if I want to spend $10K on a trip it will really cost me $13,888 including the tax hit of draw.
Like I said, lots of different ways to do it and you just need to find one that works for you. Maybe a combo of automatic monthly draws for income and occasional for lumps.
I had problems keeping track of my taxes due early on so that would be my advice.
Good hunting !!

 

[OldShooter]

I agree with most. DW and I just take distributions as we need them, typically for "lumps." Minimum two lumps a year for property taxes and then a December lump for tax withholding. Usually we don’t bother to work up an estimate for the tax; we just take an IRA distribution and withhold the safe harbor amounts for Fed and State. Safe harbor is either 100% or 110% of prior year's taxes depending on your income.

Note that paying the safe harbor in one lump totally eliminates the need to fool with withholding on individual distributions and eliminates the need to estimate income from investments. Basically no calculations at all. The only hitch comes if the prior year's taxes were unusually high compared to current year taxes. In that case you'll end up giving our uncle an interest-free loan for a few months or you can just withhold 90% of this year's taxes but then you're back to doing some calculations again.

 

[Sunset]

OP - You didn't say age, hopefully its older than 59.5 or there is a tax penalty for some withdrawals.

We do lumpy withdrawals, mostly just for Roth Conversions.
Even if I think I might need the cash , better to do Roth Conversions and can always withdraw from Roth later if really needed the $$$ and in the meantime it earns tax free.

 

[Sunset]

I basically retired at the end of 2024. ......

............ I use an enrolled agent for taxes and will be soliciting her advice as well.

What is an enrolled agent for taxes

 

[Al18]

I just have Federal and State taxes withheld when I make my IRA withdrawals, and pay no estimated taxes.

If you own stocks in a brokerage account, you can sell nearly $130K per year and owe no taxes if you file MFJ and in the 12% tax bracket and have owned the stocks at least 1 year.

 

[Gumby]

I just have Federal and State taxes withheld when I make my IRA withdrawals, and pay no estimated taxes.

If you own stocks in a brokerage account, you can sell nearly $130K per year and owe no taxes if you file MFJ and in the 12% tax bracket and have owned the stocks at least 1 year.

You can sell more stocks than that. You can take $130k in long term capital gains capital gains. I know that's what you meant, but thought a clarification might be useful.

 

[Dtail]

The way I have been doing it is like Gumby. I buy the tax software on black Friday, and then in December, do my taxes with estimates, entering all of the existing IRA withdrawals. Then I construct a year-end withdrawal to tune against marginal tax rate, IRMAA, ACA, etc. Within that withdrawal, I set the withholding percentages to pay state and federal taxes such that I owe about $100 each. Sometimes those percentages are huge (most of the withdrawal goes to the government). The challenge for you is that in order to get estimates entered properly when you don't have the previous year withdrawal forms to see how it's reported. For instance, IRA withdrawals' 1099 usually have box 7 has a "7" and IRA/SEP/SIMPLE box checked. Just come on here and ask when the time comes to make sure.

This is conceptually what I will be doing this year, as the ACA is now past me, except no state tax.

 

[pb4uski]

I do my Roth conversions in December so that I can fine tune the amount as necessary to keep my AGI and taxable income where I need them to be.

Another strategy that the OP might consider based on circumstances is to do Roth conversions to the top of a given tax bracket with withholdings for taxes (ideally each December) and then withdraw from the Roth for spending.

A Roth conversion suceeded by a Roth withdrawal in the same year is equivalent to a tIRA withdrawal.

 

[pb4uski]

What is an enrolled agent for taxes

Just going from memory, a designation granted by the IRS to people who have demonstrated knowledge about taxes.

 

[Gumby]

Another strategy that the OP might consider based on circumstances is to do Roth conversions to the top of a given tax bracket with withholdings for taxes (ideally each December) and then withdraw from the Roth for spending.

A Roth conversion suceeded by a Roth withdrawal in the same year is equivalent to a tIRA withdrawal.

A good plan. Then you are not taxed on the growth before you get around to spending it.

 

[5Miler]

I lived off my IRA withdrawals for the first 10 years of my retirement. As I am mostly allergic to spreadsheets and any form of higher math, I did a rough determination of my annual income needs and tax liability, then had a monthly withdrawal deposited in my checking account with appropriate Fed taxes withheld. If I had any lumpy expenses pop up I would just take an additional withdrawal as needed usually not even needing to withhold taxes on the extra withdrawal. I never had any issue with tax penalties as I usually over withheld slightly so was due a refund each year of a hundred dollars or so which I usually just rolled into the next year.

My income streams are very predictable so it was easy to work out my income and tax situation early in the year other than life's little surprises we all run into on occasion.

 

[Elizrogers]

I basically retired at the end of 2024. I say "basically" because I am still supporting my old organization at the level of a few hours per week. Nice beer money and since my expenses are minimal, I don't expect to need to start making IRA withdrawals until mid 2025 except possibly to cover a big trip in April/May. But even that I think I can cover with what I have and the beer money I expect.

My question is about logistics. Once I start making IRA withdrawals, how does it work for taxes? My money is (or will be) with a major mutual fund company (T. Rowe Price) and I think they can withhold taxes and set up monthly or quarterly automatic withdrawals (but I need to check on that.) Is it best to set up automatic periodic withdrawals or to withdraw as needed. My needs will be very lumpy as my routine expenses are relatively minimal and the big expenses will be for travel a few times per year.

For taxes, I have paid estimated taxes in the past and I am admittedly not great at it. I've often forgotten a payment and paid a small penalty. It's never been enough to make me change my ways and pay more attention to deadlines. For the record, when I had to pay quarterly business taxes for rentals I was always on top of it so maybe I will be better about quarterly taxes in retirement if I take that route.

I'm interested in how everyone handles these logistics. I use an enrolled agent for taxes and will be soliciting her advice as well.

I also only take out for special needs, usually major home repairs, but I am now at the age where I have to take RMD every year, as well. When I withdraw, I just have Fidelity take 10% tax at the same time. Seems to work out, as I get money back every year.

 

[Koolau]

I typically take out my RMD plus other needs from my 401(k) at the first of the year. I have a certain amount withheld and that covers my other income as well (such as Pension and lumpy dividend, etc. income). Sometimes I have to take more later in the year. I have a certain amount withheld then as well. I always get money back.

 

[pb4uski]

I haven't taken anything for spending. The only reductions have been for Roth conversions, generally to the top of the 15%/12% tax bracket. But even those haven't dramatically changed the balance from when I retired. In short, I've been Roth converting the growth.

We've been living off taxable accounts, my small pension and DWs small SS, but the taxable account is closed to gone right about the time I turn 70 and begin SS, so it's all working out perfectly. Will begin modest withdrawals soon.

 

[Koolau]

I haven't taken anything for spending. The only reductions have been for Roth conversions, generally to the top of the 15%/12% tax bracket. But even those haven't dramatically changed the balance from when I retired. In short, I've been Roth converting the growth.

We've been living off taxable accounts, my small pension and DWs small SS, but the taxable account is closed to gone right about the time I turn 70 and begin SS, so it's all working out perfectly. Will begin modest withdrawals soon.

I had intended to head in a similar direction at the beginning of my retirement. Turns out I didn't have nearly enough non-qualified money to do that. Good for you for making it w*rk according to your plan.

The good news is that it basically just cost me more taxes than I had hoped.

 

[drdb]

I don't think anyone has pointed out explicitly that, unlike with estimated taxes, the IRS doesn't care at what point in the year you do your withholding from IRA withdrawals. You can postpone all your withholding until the end of the year and even have 100% of a withdrawal go to withholding without facing a penalty. It's up to you what you're comfortable with.