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We generally know our yearly income early in the year, and sometime before the end of the year, we make a withdrawal from an IRA and have it all, or nearly all, withheld for paying that year’s taxes.
In many (most?) cases, that method would result in a penalty for underpayment of estimated taxes.
We are required to withhold from our IRA withdrawals for NC taxes. I forget the percentage, but most years, we end up with a refund.
I pay our fed taxes by quarterly estimates. After I dumped the cpa and returned to doing the taxes myself, we end up with a small refund which I just rollover to next year's taxes.
I've told DH that if I croak, he should switch to withholding for all IRA distributions and SS. If all our income was SS, I'd probably do withholding.
I am in RMD Territory the past few years, so I have Fidelity do the math on my IRA in December and then send a monthly 'paycheck' to my local bank. I also have Fido send 1/12th of last year's tax bill to the IRS and to the State of SC. This smooths out our Cash Flow because my RMD is larger than my SS or pension.
This method avoids any tax penalties. It gets me close to the amount I owe the tax man at the end of the year. I don't mind writing them a small check to settle the bill. I don't want to wait for the IRS to mail me a Refund.
We use our RMDs for tax withholding. Since we take non-QCD RMDs late in the year, I do an income estimate in Sept-Oct. Once I determine our estimated taxable income, we'll have fed and state taxes paid through RMDs. I also make sure we're within the safe harbor limits for taxes owed (the IRS deems taxes withheld to have occurred evenly throughout the year).
Which do you do? How has it worked for you?
Why did you decide on one versus the other?
Me:
I helped my retired mom with her finances. Now I'm thinking ahead for when I retire.
Mom made quarterly payments. And when she got dementia I made sure they were paid.
And I just didn't like having to remember that.
I'm single no kids. So looking ahead, I may not have someone dependable who can seamlessly step in and keep the finances from falling apart.
(Yes I have a will, POA, Med Directive and all that and my executor/POA knows she's been named. But that's still not the same as having a loving person who already knows your finances so if you get sick they don't mis a beat with making sure your bills get paid, etc.)
So as much as I hate to have the taxes withheld (my gross retirement income sure looks a lot better than the after-taxes amount)...I don't want to pay quarterly either. And since in this instance I won't be able to have my cake and eat it, too....I'm leaning toward just have taxes held from my pension and Soc Sec. And I'll have a little bit of other income from which taxes cannot be withheld.
How have you handled taxes in retirement?
I have my taxes withheld from my pension and my SS.
Location: Was Midvalley Oregon; Now Eastside Seattle area
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Kinda varies for us. When we had rising Incomes we did quarterlies. When our Income was stable we made withholdings. Market and Income timing.
We have a rental that pays us well. A single missed payment is nearly our annual tax obligation.
About 20% of our Income is in, GWLB Variable annuities (IRAs). We have have no obligation to even make a withdrawal but for RMD sake. Thus far, we have only been doing RMD's but I think 2024, I will begin full allowable guaranteed distributions.
I know our effective tax rate and the approximate tax. We will pay the tax from 2 or more annuities. Probable, I will just take the 10% standard withholdings from the annuities and IRA trading accounts, in the next fiscal annuity cycle.
YTMV
Last edited by leastprime; 08-25-2023 at 11:09 AM..
We use our RMDs for tax withholding. Since we take non-QCD RMDs late in the year, I do an income estimate in Sept-Oct. Once I determine our estimated taxable income, we'll have fed and state taxes paid through RMDs. I also make sure we're within the safe harbor limits for taxes owed (the IRS deems taxes withheld to have occurred evenly throughout the year).
That’s approximately what we do, although we’re not yet to RMD age, but we will continue this process using RMDs, as you do, later in the year and within safe harbor parameters.
Like you, we understand that taxes paid with traditional IRA withholding/withdrawals are deemed as paid evenly through the year.
Through the IRS website, you can set up estimated payments that are automatically paid by credit card on the date you set. So when we do taxes, we set up the next years estimated payments and scheduled due dates- they can be automatically processed through either the direct pay or EFTPS system. Pretty easy. We also normally re process any overpayment of tax as part of the estimated payment for the next year.
If you do Turbo Tax they automatically set up 4 vouchers to pay estimated tax for the next year.
Take this year's tax & divide by 4. Easy
Put this in your To Do list so you don't forget.
Put it in your budget software.
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