Retirees and estimated tax payments

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Retirees and estimated tax payments

Post by Mark1Zoril »

I am a financial advisor. I was talking with an acquaintance about their situation. He just turned 65 and is retired as of early January. His wife, the same age, just retired too. They are both now getting their SS in February and will also be withdrawing from their IRA's as well to supplement their monthly income. While I do not know for sure, I would guess their monthly income from everything is around $95 to $100K or so.

What is odd, though, is that his advisor (his wife's advisor who is a Raymond James B/D) has suggested that they not withhold anything throughout the year from the SS payments or their IRA's. They have no other income at all during the year. They will meet again in November and review everything and deal with it at that time. Or maybe this isn't odd and it is a smart strategy. But I am thinking he is going to get nailed with a penalty that could be easily avoided.

I am no tax expert, but aren't estimated tax payments necessary if you want to avoid an IRS penalty?? I could certainly be missing something here, but curious to know who has an idea on this. Thanks.
Sidney
Posts: 6751
Joined: Thu Mar 08, 2007 6:06 pm

Re: Retirees and estimated tax payments

Post by Sidney »

It is easy enough to calculate whether estimated tax and/or withholding is needed. IRS Publication 17 has a section on it. I'd start by looking at the section on page 45 that tells what the thresholds are.
I always wanted to be a procrastinator.
User avatar
cheese_breath
Posts: 10358
Joined: Wed Sep 14, 2011 7:08 pm

Re: Retirees and estimated tax payments

Post by cheese_breath »

Withholding and estimated tax payments aren't the same thing. You said their FA didn't want them withholding anything. You didn't say he didn't want them paying estimated taxes. Maybe that's what he wants them to do?
The surest way to know the future is when it becomes the past.
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

I understand the difference between withholding and ETP. He told me that the advisor made no mention of making estimated tax payments. He was surprised when I mentioned it. That is why I am posting the question.
ubermax
Posts: 1730
Joined: Tue Feb 11, 2014 2:19 pm
Location: Connecticut

Re: Retirees and estimated tax payments

Post by ubermax »

Sidney wrote:It is easy enough to calculate whether estimated tax and/or withholding is needed. IRS Publication 17 has a section on it. I'd start by looking at the section on page 45 that tells what the thresholds are.
+1 also, they may have hefty deductions , the last 2 tax years we've had 0 tax liability , for '15 I'm withholding 10% from my RMDs just for a buffer but it probably won't be necessary , when we're both getting RMDs things might be different , we'll see , but no we're not filing estimated taxes so far .
User avatar
cheese_breath
Posts: 10358
Joined: Wed Sep 14, 2011 7:08 pm

Re: Retirees and estimated tax payments

Post by cheese_breath »

In that case unless there's some esoteric reason why the $90K-$100k isn't taxable, yes they will be subject to penalties if Uncle Sam doesn't get his share on a quarterly basis.
The surest way to know the future is when it becomes the past.
dolphinsaremammals
Posts: 2094
Joined: Tue Jul 22, 2014 4:18 pm

Re: Retirees and estimated tax payments

Post by dolphinsaremammals »

Their monthly income is $100K? Feels faint. :D Are you sure you don't mean annual income?

It could be that they give a lot to charity, have high property taxes, high medical expenses, and will owe little in taxes. Or, maybe not and the FA is nuts.

It's not rocket science in a simple situation such as that sounds like to crunch numbers and see what the tax situation is likely to be.

I'm retired with just SS, minor taxable interest, and IRA RMDs, and I just pay one estimated tax payment near the beginning of the year, because my taxes are minimal due to a situation such as the above.
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

cheese_breath wrote:In that case unless there's some esoteric reason why the $90K-$100k isn't taxable, yes they will be subject to penalties if Uncle Sam doesn't get his share on a quarterly basis.
Thanks. I cannot see any way that they would not have a penalty. I am thinking there might be some funky way that an advisor will come up with, but I just don't know what it would be.
PatrickA5
Posts: 553
Joined: Mon Jul 28, 2014 1:55 pm

Re: Retirees and estimated tax payments

Post by PatrickA5 »

If they really have $95K of income, they'll need to either withhold taxes or pay estimated payments. This is assuming that most of the money is taxable income (i.e. pensions, 401Ks, traditional IRA's, etc). With that kind of income, most likely around 85% of SS is also going to be taxable.
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

dolphinsaremammals wrote:Their monthly income is $100K? Feels faint. :D Are you sure you don't mean annual income?

It could be that they give a lot to charity, have high property taxes, high medical expenses, and will owe little in taxes. Or, maybe not and the FA is nuts.

It's not rocket science in a simple situation such as that sounds like to crunch numbers and see what the tax situation is likely to be.

I'm retired with just SS, minor taxable interest, and IRA RMDs, and I just pay one estimated tax payment near the beginning of the year, because my taxes are minimal due to a situation such as the above.
Oops. Monthly!! No I meany annually! Fromm what I know, they have virtually no deductions. I am thinking they do not even itemize.
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

ubermax wrote:
Sidney wrote:It is easy enough to calculate whether estimated tax and/or withholding is needed. IRS Publication 17 has a section on it. I'd start by looking at the section on page 45 that tells what the thresholds are.
+1 also, they may have hefty deductions , the last 2 tax years we've had 0 tax liability , for '15 I'm withholding 10% from my RMDs just for a buffer but it probably won't be necessary , when we're both getting RMDs things might be different , we'll see , but no we're not filing estimated taxes so far .
Thanks, but in their case I think they have very few deductions at all.
User avatar
celia
Posts: 12409
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: Retirees and estimated tax payments

Post by celia »

They should have enough info soon to estimate their 2015 tax liability. They can either pay it through withholdings or pay it at the end of the year, if anything is due. The IRS will know that SS is paid monthly and if there is a tax payment shortfall, they can calculate the penalty.

Perhaps, they are taking all of their IRA withdrawals at the end of the year.

Or if their withdrawals are from Roths, they probably won't owe any taxes.
A dollar in Roth is worth more than a dollar in a taxable account. A dollar in taxable is worth more than a dollar in a tax-deferred account.
User avatar
CABob
Posts: 5021
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: Retirees and estimated tax payments

Post by CABob »

I suspect that there is something lost in translation from the FA recommendation to the client and then to you.
First of all at that income level I would expect that some taxes will need to be paid.
Secondly, The taxes can be paid by estimated payment or by withholding from withdrawals.
Withheld payment are considered to have been paid throughout the year to get around the penalty for not making estimated payments.
Therefore, I suspect that the part left out of the FA recommendation is that a withdrawal be made late in the year and the total expected tax withheld from that withdrawal.
I take a withdrawal from my tax deferred account late in the year and have taxes equal to the prior years tax liability withheld from it. This way I meet IRS requirements.
Of course, I may have missed the point completely.
I might mention that for a couple of years after wife and I retired, after we were both age 65, and before taking any RMDs I did have a zero tax liability. I was so shocked when I did my taxes the first time I redid the taxes several times thinking I had made a mistake.
Bob
User avatar
Dale_G
Posts: 3395
Joined: Tue Feb 20, 2007 5:43 pm
Location: Central Florida - on the grown up side of 83

Re: Retirees and estimated tax payments

Post by Dale_G »

Estimated tax payments are not required if withholdings at any time of the year are enough to meet the safe harbor requirements.

I do not make estimated payments (I do have a small amount withheld from an annuity payment). I take the bulk of my RMD at the end of the year - and have enough taxes withheld at that time to meet my obligations.

There is no penalty for using this procedure.

Dale
Volatility is my friend
Ron
Posts: 6740
Joined: Fri Feb 23, 2007 7:46 pm
Location: Allentown–Bethlehem–Easton, PA-NJ Metropolitan Statistical Area

Re: Retirees and estimated tax payments

Post by Ron »

Quarterly taxes on retirement distributions need not be done. A payment in December is considered by the IRS to have been applied throughout the year.

One reference: http://financialducksinarow.com/1663/ir ... -payments/

BTW, Taylor has mentioned this technique in the past, as I remember.

- Ron
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

CABob wrote:I suspect that there is something lost in translation from the FA recommendation to the client and then to you.
First of all at that income level I would expect that some taxes will need to be paid.
Secondly, The taxes can be paid by estimated payment or by withholding from withdrawals.
Withheld payment are considered to have been paid throughout the year to get around the penalty for not making estimated payments.
Therefore, I suspect that the part left out of the FA recommendation is that a withdrawal be made late in the year and the total expected tax withheld from that withdrawal.
I take a withdrawal from my tax deferred account late in the year and have taxes equal to the prior years tax liability withheld from it. This way I meet IRS requirements.
Of course, I may have missed the point completely.
I might mention that for a couple of years after wife and I retired, after we were both age 65, and before taking any RMDs I did have a zero tax liability. I was so shocked when I did my taxes the first time I redid the taxes several times thinking I had made a mistake.
Thanks. he was going to dig a bit more and get back to me. However, we was quite clear that they were instructed not to withhold anything at all from his IRA account withdrawals and none from he SS either. Also, he has very little in Roth IRA's - most of the withdrawals will be taxable. You are correct in that he may not be understanding the situation correctly, but he seemed very clear on it. That could be wrong, but I will see when he gets back to me.
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

Ron wrote:Quarterly taxes on retirement distributions need not be done. A payment in December is considered by the IRS to have been applied throughout the year.

One reference: http://financialducksinarow.com/1663/ir ... -payments/

BTW, Taylor has mentioned this technique in the past, as I remember.

- Ron
Hmmm. Interesting point. Thanks for sharing it. This is likely what the advisor is recommending.
dolphinsaremammals
Posts: 2094
Joined: Tue Jul 22, 2014 4:18 pm

Re: Retirees and estimated tax payments

Post by dolphinsaremammals »

CABob wrote: I might mention that for a couple of years after wife and I retired, after we were both age 65, and before taking any RMDs I did have a zero tax liability. I was so shocked when I did my taxes the first time I redid the taxes several times thinking I had made a mistake.
This ought to be brought to more people's attention. I was so stunned by the several years of very low taxes before RMDs that I didn't take advantage of as much of the opportunity to convert traditional IRAs to Roths as I should have,
User avatar
CABob
Posts: 5021
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: Retirees and estimated tax payments

Post by CABob »

dolphinsaremammals wrote:
CABob wrote: I might mention that for a couple of years after wife and I retired, after we were both age 65, and before taking any RMDs I did have a zero tax liability. I was so shocked when I did my taxes the first time I redid the taxes several times thinking I had made a mistake.
This ought to be brought to more people's attention. I was so stunned by the several years of very low taxes before RMDs that I didn't take advantage of as much of the opportunity to convert traditional IRAs to Roths as I should have,
And I also.
:oops:
Bob
spectec
Posts: 1617
Joined: Mon Jul 14, 2014 8:00 am

Re: Retirees and estimated tax payments

Post by spectec »

As has already been pointed out, taxes withheld from wages or from IRA distribtuions are considered to have been paid in equal installments throughout the year. Therefore, one can calculate their tax liabiity, pay nothing throughout the year, and then have it all withheld from a single IRA withdrawal in Nov-Dec. Provided their tax calculation is correct, there will be no estimated tax penalty. It has always been like this and will remain so unless IRS eventually closes this small loophole for avoiding an estimated tax penalty.

I don't think it costs the government very much, because people to employ this strategy can usually afford to make quarterly payments anyhow. So the only benefit the government would receive is that they would get their hands on the money a little earlier in the year. But in order to do that, the IRS would have to initiate some sort of system for tracking when money is actually withheld from earnings and IRA distributions. Given the way the system presently works, that would be a huge task. Not worth the extra paperwork and compliance measures required to implement it.
Don't gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don't buy it. - Will Rogers
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Retirees and estimated tax payments

Post by Browser »

Dale_G wrote:Estimated tax payments are not required if withholdings at any time of the year are enough to meet the safe harbor requirements.

I do not make estimated payments (I do have a small amount withheld from an annuity payment). I take the bulk of my RMD at the end of the year - and have enough taxes withheld at that time to meet my obligations.

There is no penalty for using this procedure.

Dale
That is my understanding also. For the last 3 years I have not made estimated tax payments and follow the same procedure of taking my RMD at the end of the year and having the appropriate amount withheld for tax. This is much less hassle than remembering to do quarterly estimated tax payments and it also serves the purpose of allowing my tax allocation continue to earn returns for most of the year.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
cheese_breath
Posts: 10358
Joined: Wed Sep 14, 2011 7:08 pm

Re: Retirees and estimated tax payments

Post by cheese_breath »

Browser wrote:
Dale_G wrote:Estimated tax payments are not required if withholdings at any time of the year are enough to meet the safe harbor requirements.

I do not make estimated payments (I do have a small amount withheld from an annuity payment). I take the bulk of my RMD at the end of the year - and have enough taxes withheld at that time to meet my obligations.

There is no penalty for using this procedure.

Dale
That is my understanding also. For the last 3 years I have not made estimated tax payments and follow the same procedure of taking my RMD at the end of the year and having the appropriate amount withheld for tax. This is much less hassle than remembering to do quarterly estimated tax payments and it also serves the purpose of allowing my tax allocation continue to earn returns for most of the year.
Hmmm. Well, live and learn. Do you withhold a percentage or a specific number of dollars?
The surest way to know the future is when it becomes the past.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Retirees and estimated tax payments

Post by Browser »

Pretty easy to estimate your taxable income before year-end. If you withhold a dollar amount that is either equal to the previous year's tax or at least 90% of your tax obligation there are no penalties. I use the previous year's HR Block or Taxcaster to figure my tax pretty closely and then I under-withhold a bit so I won't have any refunds coming. Uncle Sam doesn't get one-cent more than he has coming to play around with before giving me back my own money without any interest. Never could understand why people are happy to get refunds, since that is essentially a benchmark of incompetence in dealing with the tax man.
We don't know where we are, or where we're going -- but we're making good time.
User avatar
CABob
Posts: 5021
Joined: Sun Feb 25, 2007 8:55 pm
Location: Southern California

Re: Retirees and estimated tax payments

Post by CABob »

Do you withhold a percentage or a specific number of dollars?
I start with a dollar amount which is the prior year's tax liability and convert that to a percentage.
Bob
OutInThirteen
Posts: 381
Joined: Thu Mar 14, 2013 2:11 pm

Re: Retirees and estimated tax payments

Post by OutInThirteen »

cheese_breath wrote: Hmmm. Well, live and learn. Do you withhold a percentage or a specific number of dollars?
Not Browser here, but this is how it will work for me with my Fidelity administered 403(b) account this year (my first year to do this - and not yet at the age where RMDs kick in):

If I wait until the end of December, I'll know the minimum amounts (Federal and state) needed to meet one of the safe harbors (in addition to any withholdings from my part-time consulting salary - I don't have anything withheld from my pension). With Fidelity, I can designate a percentage for Federal withholding, but I can only designate state withholding in whole dollars - so a combination. The amount of the withdrawal will equal the total of Federal and state withholdings.

It appears to depend upon the specific process used by the firm administering your account. I've also read that some firms will not withhold state taxes, but I'm not sure. I'm glad I did a trial run when I learned of this withholding approach - much easier than calculating and making estimated tax payments!
Bill M
Posts: 438
Joined: Sun Dec 30, 2012 10:10 pm

Re: Retirees and estimated tax payments

Post by Bill M »

I have found it a hassle to change the withholding rate for SocSec or for a pension (had to do this for my Mom several times, not for me yet). It was much easier to do the quarterly estimated payments -- each 25% of the safe harbor amount.
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Retirees and estimated tax payments

Post by Browser »

Bill M wrote:I have found it a hassle to change the withholding rate for SocSec or for a pension (had to do this for my Mom several times, not for me yet). It was much easier to do the quarterly estimated payments -- each 25% of the safe harbor amount.
In my case, I don't have anything withheld from Social Security (don't have a pension or annuity). I have it all withheld from my retirement account distribution and just take one distribution to meet my RMD in December. The only hassle is calling them up once a year and telling them how much I want distributed and how much to withhold for tax. Admittedly, it would be easier to put all this on autopilot and take monthly or quarterly distributions with withholding tax. But I'd still have to call them every year to change my withdrawal amount and withholding (since the RMD changes) or have them calculate my RMD for me and withhold a fixed percentage. But that's not terribly precise and I'd probably end up having to err on the side of having too much withheld each year to avoid a penalty. So, at least until I have dementia and can't do the math anymore, I choose to do it the way I do it.
We don't know where we are, or where we're going -- but we're making good time.
investor
Posts: 1010
Joined: Mon Feb 19, 2007 10:50 pm

Re: Retirees and estimated tax payments

Post by investor »

I have Vanguard calculate my RMD, take it in December and have designated percents for federal and state taxes withheld. If I have extra capital gains that year, I simply adjust my IRA RMD withholding. Also have withholding from pension. Never a need to mess with estimated taxes.

investor
AWH_CPA
Posts: 247
Joined: Tue Jan 20, 2015 6:44 pm

Re: Retirees and estimated tax payments

Post by AWH_CPA »

he probably wants the money kept in the IRA till December so he can charge the full year of management fees on the tax dollars. Then he will make a large December distribution and apply the majority of it to federal/state withholding.

this would be better for him (the advisor) as he gets to charge more $. As long as the market goes up its better for the client as well since the value should go up more than the cost of the fee.

withholding whether from w2 income or 1099s is considered paid throughout the year even if it is all withheld in the final paycheck.
chaz
Posts: 13604
Joined: Tue Feb 27, 2007 2:44 pm

Re: Retirees and estimated tax payments

Post by chaz »

investor wrote:I have Vanguard calculate my RMD, take it in December and have designated percents for federal and state taxes withheld. If I have extra capital gains that year, I simply adjust my IRA RMD withholding. Also have withholding from pension. Never a need to mess with estimated taxes.

investor
I also do it this way.
Chaz | | “Money is better than poverty, if only for financial reasons." Woody Allen | | http://www.bogleheads.org/wiki/index.php/Main_Page
Browser
Posts: 4857
Joined: Wed Sep 05, 2012 4:54 pm

Re: Retirees and estimated tax payments

Post by Browser »

investor wrote:I have Vanguard calculate my RMD, take it in December and have designated percents for federal and state taxes withheld. If I have extra capital gains that year, I simply adjust my IRA RMD withholding. Also have withholding from pension. Never a need to mess with estimated taxes.

investor
I now get a statement from Vanguard in January telling me what my RMD for the current year will be (it's based on account balance at the end of the last year). So, they're already calculating it for me without asking. I don't have anything withheld by Vanguard, since I have another retirement account with TIAA-CREF and it all comes from that in December when I know exactly what my tax obligation will be for the year.
We don't know where we are, or where we're going -- but we're making good time.
Topic Author
Mark1Zoril
Posts: 62
Joined: Mon Mar 24, 2014 12:53 pm

Re: Retirees and estimated tax payments

Post by Mark1Zoril »

AWH_CPA wrote:he probably wants the money kept in the IRA till December so he can charge the full year of management fees on the tax dollars. Then he will make a large December distribution and apply the majority of it to federal/state withholding.

this would be better for him (the advisor) as he gets to charge more $. As long as the market goes up its better for the client as well since the value should go up more than the cost of the fee.

withholding whether from w2 income or 1099s is considered paid throughout the year even if it is all withheld in the final paycheck.
Thanks. I appreciate the more cynical viewpoint!!
Post Reply