Paying Taxes in Retirement With Tax Withholding Distributions

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G-Man

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Of course, I use large withholding from retirement account distributions. Just last week I took my RMD from my 401k and specified 100% withholding. In the next few weeks, as I refine my end of year tax return draft, I will take my RMD from my IRA, take my final QCD for the year, then specify what percentage of the remaining RMD need to be withheld to reach my end of year tax liability.

Until last week, I have not paid any federal taxes for 2023.
 
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Yes, before the end of December I make a withdraw from my IRA and have the majority of it withheld by Vanguard for federal taxes to satisfy the safe harbor from an underpayment penalty. I make other withdraws throughout the year with zero withheld and do not make estimated quarterly payments.
 
I don't use that method to pay my taxes.
Note that the 60-day rollover thing for replenishing your tIRA cannot be used for your RMD amount, once your age makes that required...
 
Been using this system for 6 years. Every December I closely calculate my final tax bill and take a W/D from my tIRA. Withholding is 99% of the withdraw amount. It is the easiest system I've found for my situation.
 
That is how I pay my taxes. One big withholding near the end of the year. Seems to work fine :)
I do not need to bother with using the 60 day rollover angle since my taxable balance is small.
 
I have been withholding from my pension. Not into RMS's yet.
 
I’ve been doing this since I fired my employer. For the first five years I had an inherited annuity I was liquidating using the five year rule, so I had no problem withholding enough from that to cover the tax bill. Now that’s done, all I have is a small inherited IRA. All of the RMDs from that go to taxes, and we withhold state tax from DW’s small pension and federal from her SS. I plan my withholding to at least cover the amount of tax paid in the previous year, avoiding an underpayment penalty. IRS treats 1099 withholding as if it were taken throughout the year.
 
I did my Roth Tax planning in Jan 2023.......I just filled out a mock 1040 form for 2023 with a $25000 conversion. I knew that my tax rate was 12%. So 25000 x 12%=3000
divide that my 12 months =$250
I then set up an auto deduction from my checking into my brokerage MM each mont and I will have the $3000 ready for my taxes at the end of Dec so I can pay for my extra taxes in Feb when I do my taxes............no CPA needed.
 
G-Man said:
How anyone used the One-Time Tax Withholding Distribution strategy in retiremment to pay taxes rather than paying quarterly taxes or having the IRS withholds a certain percentage from each distribution based on what your tax liability is assumed to be for the year?Sure. ...
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Sure. Works fine for us both federal and state. States may vary though; be sure to check.
 
We have always waited till we file our taxes to pay. Up until this year it really has not been a lot and we have never been charged penalties. I am going to try this method for 2023 and see if we get penalties, if we do, I will change tactics for 2024.
 
G-Man said:
Help me understand the Real-World Example in the article below where it talks about replenishing the $800k back to the IRA on the same day to avoid any tax on the distribution.

https://www.wealthenhancement.com/s...ng-distributions-MCZONPZOTEFVHDLH4BYDSV5AKZIU
Click to expand...

You may "borrow" from your IRA tax free as long as the full amount of the distribution is returned to an IRA within 60 days.

So take a withdrawal, withhold as needed, return the withdrawal within 60 days.

End result is no taxable income and tax payment done.

Better to not wait 60 days, especially if that puts you into new tax year. Does not change tax result but could complicate your tax filing.
 
The scheme does not reduce your taxes. It just rearranges when you pay them.
 
I learned this strategy from the people on this site and have used it for several years. I find the process easier than the quarterly payment process. My current monthly tax withholding from my pension is for my pension income. By mid-December I will have modeled my 2023 tax return covering all of our income. At that time I will make a withdrawal from my 401k, with the vast majority of it withheld for federal and state taxes.

I do not worry about replenishing, my 401K is big enough that much of it will not be converted to Roth by the time I reached RMD age. I see this as potentially reducing those future RMDs (though even with these withdrawals to pay taxes the 401K is still more than when I retired, first world issue :)).
 
ShokWaveRider said:
We have always waited till we file our taxes to pay. Up until this year it really has not been a lot and we have never been charged penalties. I am going to try this method for 2023 and see if we get penalties, if we do, I will change tactics for 2024.
Click to expand...
Exactly what I am doing also...........we will see in feb with we have any penalty when we do the taxes
 
ShokWaveRider said:
... I am going to try this method for 2023 and see if we get penalties ...
Click to expand...

Rjhasti said:
... we will see in feb with we have any penalty when we do the taxes
Click to expand...
We have been doing this for years with no penalties except (true confessions time) last year when I paid 100% of the prior years taxes, forgetting that at our AGI we are required to pay 110%. :facepalm:
 
Old Shooter..............you really do live on the edge............love your stories
 
jollystomper said:
I learned this strategy from the people on this site and have used it for several years. I find the process easier than the quarterly payment process. My current monthly tax withholding from my pension is for my pension income. By mid-December I will have modeled my 2023 tax return covering all of our income. At that time I will make a withdrawal from my 401k, with the vast majority of it withheld for federal and state taxes.

I do not worry about replenishing, my 401K is big enough that much of it will not be converted to Roth by the time I reached RMD age. I see this as potentially reducing those future RMDs (though even with these withdrawals to pay taxes the 401K is still more than when I retired, first world issue :)).
Click to expand...

Ok. So, you don't need to replenish your 401k or T-IRA?
 
jollystomper said:
By mid-December I will have modeled my 2023 tax return covering all of our income. At that time I will make a withdrawal from my 401k, with the vast majority of it withheld for federal and state taxes.
Click to expand...
This is what I will do in a few weeks.
 
I do not like to pay fees, or interest. So I pay my taxes. On time.
 
I return a portion of the distribution using the 60 day rollover to cover the Roth Conversion taxes, this allows those taxes to be paid from Brokerage "Taxable" Funds. The 60 day also lets me set my AGI at or below AGI target for the year.
 
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