SS W-4V options 0, 7, 10, 12, 22% ? WTH?

[camfused]

^^^ Seems like a TT bug, and as others have said, next time let the IRS calculate it.

 

[RetiredHappy]

^^^ Seems like a TT bug, and as others have said, next time let the IRS calculate it.

What do you mean by let IRS calculate it?

 

[Gumby]

If you owe a penalty, the IRS will calculate it and send you a letter telling you how much to pay.

 

[RetiredHappy]

If you owe a penalty, the IRS will calculate it and send you a letter telling you how much to pay.

Over $4, I wasn't going to wait and find out. Moreover, TT calculated my refund minus the $4. Not going to mess with it. I don't even think there was an option to say, hey you owe my refund and don't take out the $4!

 

[Koolau]

See The RMD Solution to the Hassle of Filing Estimated Taxes in Retirement

Basically, you do not do quarterly tax payments. Instead, you pay your Fed (and probably state) taxes via a 100% withholding withdrawal from your tIRA. Advantages:
a) Allows you to do this in December, when you know more what your tax/income is for the year
b) Lets you skip quarterly taxes
c) Lets you pay via tIRA funds, and not use up your cash
d) Lets you (at least partially) satisfy RMD requirements for the year
e) Helps you reduce the size of your tIRA, reducing future RMD amounts

Must this method be used only with a tIRA or can it be used with a 401(k)?

 

[RetiredHappy]

I went back to read all the responses and I think you all missed is that we took a huge chunk of RMD in January with no withholding, hence income was not evenly taken out through the year. In Dec, we took the the remaining RMD and withheld 99%. So, while withholding was treated as being evenly taken out every quarter, our huge RMD in January incurred much more taxes in the first quarter than the evenly treated withholding.

 

[ERD50]

I went back to read all the responses and I think you all missed is that we took a huge chunk of RMD in January with no withholding, hence income was not evenly taken out through the year. In Dec, we took the the remaining RMD and withheld 99%. So, while withholding was treated as being evenly taken out every quarter, our huge RMD in January incurred much more taxes in the first quarter than the evenly treated withholding.

Yes, but from the form and comments from Texas Proud, that doesn't seem to matter.

It seems like a TurboTax bug then, and I agree $4 is not worth chasing down, but I will watch for this on my own account, just for my own satisfaction of understanding the rules.

If you wanted to do it out of curiosity, you could report it as a bug to TT.

 

[ERD50]

Must this method be used only with a tIRA or can it be used with a 401(k)?

As I understand it, it applies to ANY withholding. You could lump your w/h from your SSA, a pension, any IRA withdrawal, salary if employed, anything that allows w/h.

 

[Healthy Lifestyle]

See The RMD Solution to the Hassle of Filing Estimated Taxes in Retirement

Basically, you do not do quarterly tax payments. Instead, you pay your Fed (and probably state) taxes via a 100% withholding withdrawal from your tIRA. Advantages:
a) Allows you to do this in December, when you know more what your tax/income is for the year
b) Lets you skip quarterly taxes
c) Lets you pay via tIRA funds, and not use up your cash
d) Lets you (at least partially) satisfy RMD requirements for the year
e) Helps you reduce the size of your tIRA, reducing future RMD amounts

Thank you for informing me Camfused.
Does this December tIRA withdrawal with 99% tax withholding work when I do Roth conversions, as I am not yet taking RMD's (67)?

 

[TheWizard]

Can you please explain (need learning lesson) the
“December tIRA withdrawal with 99% withholding.”, when dealing with end of year taxes? Some have referred to this as end of year trick?

Others have explained this "trick", now I'll explain why it's not always a good idea.
The main reason is: I don't want to withdraw more from tax-deferred than my RMD, including any QCDs I choose to do.
And my RMD has basically no connection to what my Federal tax liability for the year is; it could be half or it could be double.

Now I'm sure that some folks with large RMDs can tune their end of year withholding to a Safe Harbor amount and that's fine...

 

[camfused]

Thank you for informing me Camfused.
Does this December tIRA withdrawal with 99% tax withholding work when I do Roth conversions, as I am not yet taking RMD's (67)?

I am 65, so in the same row boat as you. My plan is to do Roth conversions separately, with no tax withholding, maybe in the Spring or so, then do two separate 100% (or 99% if restricted) for the fed and state withholdings in December. I don't see why you couldn't do them all in one withdrawal, but it's easier for me to keep track of with separate ones.

Dollar cost averaging would tell you to do several of the Roth conversions over the course of the year, so there is that consideration too.

 

[RetiredHappy]

See this explanation from TurboTax If i pay all of my taxes out of my IRA in late december is that considered on time and no penalty for not paying them thru the year

 

[TheWizard]

I'm sure most people understand this, but for those who don't: all tIRA withdrawals, whether for tax withholding or not, add to your AGI and taxable income for the year.
This is true whether the withdrawal is part of your RMD or not...

 

[USGrant1962]

Just keep in mind that the withdrawal to pay your taxes is also taxable income.

 

[camfused]

^^^ Yes, but if you do the 100% withholding for at least 110% of your previous year's tax amount, you are protected by Safe Harbor. And, if you are still short, you take that amount out next year, the same way, to pay the difference.

Unless I do massive Roth conversions, I can't take out enough of my tIRA to deplete it (and stay under the yearly IRMAA limit) in my lifetime, so using the tIRAs to pay my taxes works quite well for me. I am also doing Roth conversions, up to the IRMAA limit, for the next 16 years, when (for some reason I do not understand), any further conversions (no matter how small) actually reduce my end net worth amount (at age 90).

 

[RetiredHappy]

^^^ Yes, but if you do the 100% withholding for at least 110% of your previous year's tax amount, you are protected by Safe Harbor. And, if you are still short, you take that amount out next year, the same way, to pay the difference.

Unless I do massive Roth conversions, I can't take out enough of my tIRA to deplete it (and stay under the yearly IRMAA limit) in my lifetime, so using the tIRAs to pay my taxes works quite well for me. I am also doing Roth conversions, up to the IRMAA limit, for the next 16 years, when (for some reason I do not understand), any further conversions (no matter how small) actually reduce my end net worth amount (at age 90).

We definitely withheld at least 110% of previous year, and had $3K in tax refund, so that does not explain it. The problem was that we took $50K out of IRA in January with no tax withheld. We were only doing RMD, not ROTH conversion.

 

[Gumby]

Just keep in mind that the withdrawal to pay your taxes is also taxable income.

So you need to gross up the amount for taxes.

 

[Koolau]

I went back to read all the responses and I think you all missed is that we took a huge chunk of RMD in January with no withholding, hence income was not evenly taken out through the year. In Dec, we took the the remaining RMD and withheld 99%. So, while withholding was treated as being evenly taken out every quarter, our huge RMD in January incurred much more taxes in the first quarter than the evenly treated withholding.

Yeah, I missed that and didn't even know it was possible not to pay. Whenever I've taken an RMD - FROM MY 401(k) - I have been forced to pay (IIRC) 20% up front to Fed taxes. Don't know about tIRA RMDs.

 

[Al18]

As I’ve mentioned many times on this forum, there is no required Federal withholding on an IRA, though the IRS recommends 10%. This is a big positive for converting your 401K to an IRA in my opinion.

 

[Texas Proud]

If the penalty is only $4, I'd rather pay the $4 than figure out that form! What a pain.

True... but once the tax program had a penalty for me (I think deserved) but it was small... I just zeroed it out and never did get anything from the IRS...

 

[RetiredHappy]

Yeah, I missed that and didn't even know it was possible not to pay. Whenever I've taken an RMD - FROM MY 401(k) - I have been forced to pay (IIRC) 20% up front to Fed taxes. Don't know about tIRA RMDs.

We did that again this year, unfortunately. Jan - $30K without withholding but it wasn't $50K. We filed taxes for 2023 in March and learned of the issue so when we did a couple of RMDs in Apr and June, we withheld 20%. I also went ahead and set up quarterly payments when we realized the problem with 2023 taxes, to hopefully address the issue. We intend to have 99% withholding for the Dec RMD. Hopefully, there is no penalty for 2024 or if there is, it will be small like $4.

 

[SecondCor521]

I went back to read all the responses and I think you all missed is that we took a huge chunk of RMD in January with no withholding, hence income was not evenly taken out through the year. In Dec, we took the the remaining RMD and withheld 99%. So, while withholding was treated as being evenly taken out every quarter, our huge RMD in January incurred much more taxes in the first quarter than the evenly treated withholding.

The IRS doesn't know (AFAIK) that your RMD was in January and that your income was therefore uneven. And I'm not sure how TT would know unless you told it. And I'm not sure why you would tell TT unless it helped reduce the underpayment penalty.

AFAICT, we still don't understand why the $4 penalty occurred. The only scenario I can imagine that fits your facts and TT not having a bug is that you had a $4 underpayment penalty to begin with. Then maybe TT offered to let you do the annualized income method to try to reduce the penalty and so you put in all that data, but since your income was frontloaded the penalty wasn't reduced. If this is the case, you could have skipped the annualized income data entry and ended up in the same spot.

But without the entire tax return and associated paperwork it's difficult to do more than just guess.

 

[RetiredHappy]

The IRS doesn't know (AFAIK) that your RMD was in January and that your income was therefore uneven. And I'm not sure how TT would know unless you told it. And I'm not sure why you would tell TT unless it helped reduce the underpayment penalty.

AFAICT, we still don't understand why the $4 penalty occurred. The only scenario I can imagine that fits your facts and TT not having a bug is that you had a $4 underpayment penalty to begin with. Then maybe TT offered to let you do the annualized income method to try to reduce the penalty and so you put in all that data, but since your income was frontloaded the penalty wasn't reduced. If this is the case, you could have skipped the annualized income data entry and ended up in the same spot.

But without the entire tax return and associated paperwork it's difficult to do more than just guess.

Did you read the TT link which I posted above?

 

[SecondCor521]

Did you read the TT link which I posted above?

Not before you asked, but now that you asked me, I did go and read it twice.

I stand by my previous reply. The TT link could have changed my mind, but did not.

Estimated taxes and underpayment penalties and Form 2210 Schedule AI are a bit tricky.

The thing to know is that withholding and estimated tax payments are treated differently by the IRS in terms of underpayment penalties and Schedule AI. The TT link you posted mostly is talking about estimated taxes and Schedule AI. You have previously stated that your December tax payment was made via withholding.

I can see how you would think that the TT link and your fact pattern would explain your underpayment penalty. But again, since the TT link is mostly talking about *estimated taxes* and you made a tax payment via *withholding*, it's really apples and oranges.

I'm now pretty sure that even with your 99% tax payment in December, you somehow fell a bit short of the safe harbors.

Now that I'm curious and if you want to bother investigating the real reason: Can you confirm that your December tax payment was done via withholding? Did your tax return include a completed Schedule AI (page 3 of Form 2210)? Did you make any estimated tax payments for that year? Since you mentioned a $3K refund, were there any amounts of that size on Schedule 3 Part II?

(If you'd rather let it go, that of course works for me too. It's $4. But I do like to see people accurately understand their taxes and what's happening with them, though, and I think in this case your understanding is missing something. Not exactly sure what that is though; even though I know a fair amount about taxes, estimated taxes and underpayment penalties are not my strongest suit.)

 

[Dalton]

It's the government we're talking about, so they aren't overthinking anything...because they know better than us, they are saving everybody from themselves by making it as simple as possible for the least common denominator, thus withholding levels that match the income tax brackets (plus a 7% thrown in for those whose income is low enough that they are below 10% after the std deduction). And, the government doesn't mind if their break points result in you giving them more money to hold until next year.

I take my inherited IRA RMD in 2 quarterly payments, and cover my safe harbor requirement by withholding with those 2 payments (I can choose the %, and I can take a larger amount than my RMD requires if I want/need to). Now I'm done withholding for the year. The 1st quarter, I technically could withhold $0, because it is less than my standard deduction (i.e. 0% tax rate), but I know pretty well what my interest and divs will add up to over the next 12 months, so I withhold for that now. The 3rd and 4th quarters I'm using dividend and interest from non-retirement accounts. I can take extra from the inherited IRA in December if I want, and can have up to all of it being withheld, or I can sell something from my brokerage (tax gain harvest?). I'm one of the low spenders, so I don't pay much tax anyway, and don't have need to do Roth conversions with my modest IRAs (I have a big brokerage acct, though ).

I also keep a tally of my withdrawals/distributions for the year, and separate them by income or ltcg, and know where the I am relative to the tax bracket breaks (taking into account the standard deduction), so I know what tax rate my next withdrawal/distribution will have. One could draw the little bar graph, that's often used to demonstrate filling the vertical levels of income tax brackets and next to it the LTCG brackets, and could sketch in where they currently fall as to what tax rate your next distribution will require to be withheld.