So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills.
Post Reply
Topic Author
catfish48084
Posts: 90
Joined: Tue Aug 14, 2018 4:55 am

So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by catfish48084 »

Getting ready to retire at the end of the year, and start living off of savings rather than the pay check ....

So how does that work in terms of paying taxes, which now are deducted from the paycheck with employer taking care of the administration? I dont imagine 401K administrator is doing that while making disbursements of what is left to me ... assume I have to set money aside for my tax obligations? And if so, when am I paying those taxes? With each disbursement? Monthly? Quarterly? I'm pretty sure when filing annual taxes, if deductions during the year have been too low, in addition to owing the balance, there are penalties for not giving the government their money soon enough. Dont think I've ever heard it discussed how the mechanics of how this retirement existence is working though
is50xenough
Posts: 323
Joined: Sat Jul 28, 2018 1:37 pm

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by is50xenough »

catfish48084 wrote: Sat Jul 24, 2021 6:18 am Getting ready to retire at the end of the year, and start living off of savings rather than the pay check ....

So how does that work in terms of paying taxes, which now are deducted from the paycheck with employer taking care of the administration? I dont imagine 401K administrator is doing that while making disbursements of what is left to me ... assume I have to set money aside for my tax obligations? And if so, when am I paying those taxes? With each disbursement? Monthly? Quarterly? I'm pretty sure when filing annual taxes, if deductions during the year have been too low, in addition to owing the balance, there are penalties for not giving the government their money soon enough. Dont think I've ever heard it discussed how the mechanics of how this retirement existence is working though
Think you just ask your retirement account holder to withhold however much taxes you want from each dispersal. Easy peasy
User avatar
sunny_socal
Posts: 2732
Joined: Tue Mar 24, 2015 4:22 pm

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by sunny_socal »

Can you just "withhold" the taxes yourself by sending some of it (eg. 20%) to a different account?
User avatar
galawdawg
Posts: 5231
Joined: Thu Dec 14, 2017 11:59 am
Location: Georgia

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by galawdawg »

catfish48084 wrote: Sat Jul 24, 2021 6:18 am Getting ready to retire at the end of the year, and start living off of savings rather than the pay check ....

So how does that work in terms of paying taxes, which now are deducted from the paycheck with employer taking care of the administration? I dont imagine 401K administrator is doing that while making disbursements of what is left to me ... assume I have to set money aside for my tax obligations? And if so, when am I paying those taxes? With each disbursement? Monthly? Quarterly? I'm pretty sure when filing annual taxes, if deductions during the year have been too low, in addition to owing the balance, there are penalties for not giving the government their money soon enough. Dont think I've ever heard it discussed how the mechanics of how this retirement existence is working though
I assume from your post that you do not have a pension (which is essentially a paycheck from which you can have federal and state taxes withheld).

Generally when you take a distribution from your IRA there will be an option for withholding federal and state taxes in an amount and/or percentage you choose. That is one option and in my opinion the simplest. (Whether that is an option from your 401k will depend upon the 401k provider). The 1099-R you receive will have similarities to the W2 you received each year from your employer. Among other things, it will show gross distribution, taxable amount, federal income tax withheld, state income tax withheld, etc.

The other option is quarterly estimated tax payments. There are a number of threads on how to set those up.

Hope that helps!
jebmke
Posts: 25475
Joined: Thu Apr 05, 2007 2:44 pm
Location: Delmarva Peninsula

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by jebmke »

sunny_socal wrote: Sat Jul 24, 2021 6:30 am Can you just "withhold" the taxes yourself by sending some of it (eg. 20%) to a different account?
You would likely still need to remit that as quarterly payments to the IRS to avoid underpayment penalties and interest when you file your tax return.
Don't trust me, look it up. https://www.irs.gov/forms-instructions-and-publications
egrets
Posts: 888
Joined: Sun Jul 05, 2020 2:56 pm
Location: Rhode Island

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by egrets »

I make a lump sum payment of estimated taxes each year about when I do my taxes for the previous year, as the latter gives me a current idea of what the new tax year taxes will be. Things don't change much for me year to year. I could probably save a bit by doing quarterly payments, but this way I don't have to worry about syncing up payments with tax obligations incurred or tracking withholdings.
SchruteB&B
Posts: 658
Joined: Mon Jul 02, 2018 7:48 am

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by SchruteB&B »

galawdawg wrote: Sat Jul 24, 2021 6:30 am
Generally when you take a distribution from your IRA there will be an option for withholding federal and state taxes in an amount and/or percentage you choose. That is one option and in my opinion the simplest.
Yes, my mother’s IRA is at Vanguard and her 403(b) is at TIAA and they both withhold federal tax from her annual distributions.
User avatar
galawdawg
Posts: 5231
Joined: Thu Dec 14, 2017 11:59 am
Location: Georgia

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by galawdawg »

SchruteB&B wrote: Sat Jul 24, 2021 6:44 am
galawdawg wrote: Sat Jul 24, 2021 6:30 am
Generally when you take a distribution from your IRA there will be an option for withholding federal and state taxes in an amount and/or percentage you choose. That is one option and in my opinion the simplest.
Yes, my mother’s IRA is at Vanguard and her 403(b) is at TIAA and they both withhold federal tax from her annual distributions.
Good to know, Dwight. By the way, are the beets ready for harvest yet? :beer
User avatar
Monster99
Posts: 628
Joined: Tue Aug 29, 2017 10:28 am

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by Monster99 »

Don't forget about state taxes - some administrators don't do state withholding. I have a pension, so I withhold both fed and state from that.
User avatar
RickBoglehead
Posts: 7877
Joined: Wed Feb 14, 2018 8:10 am
Location: In a house

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by RickBoglehead »

You can easily setup automatic quarterly federal estimated tax payments if you don't want taxes withheld on distributions. Some states may also let you setup similar payments, mine has no automatic capability, so I have it on my calendar to pay them the night prior.

OP needs to consider whether their income is going down, or up, in retirement, and ensure they comply with the safe harbor rules.

https://www.irs.gov/businesses/small-bu ... ated-taxes
Avid user of forums on variety of interests-financial, home brewing, F-150, EV, home repair, etc. Enjoy learning & passing on knowledge. It's PRINCIPAL, not PRINCIPLE. I ADVISE you to seek ADVICE.
User avatar
Padlin
Posts: 988
Joined: Thu Mar 01, 2007 6:46 pm
Location: MA

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by Padlin »

My Fidelity 401k automatically withdrew 20%, state was elective. Don't know if it was employer mandated or just Fidelity's policy. When I rolled over to an ira at Vanguard state and federal were up to me to specify. In both cases it came out of each withdrawal just like a paycheck.
Regards | Bob
User avatar
PapaGeek
Posts: 323
Joined: Sun Nov 02, 2014 8:00 am
Location: North East, Maryland
Contact:

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by PapaGeek »

Taxes during retirement can be a fairly complex issue, it all depends on the size of your benefits and the cost of the lifestyle you want to achieve.

You are probably familiar with the 10% 12% and 22% standard tax brackets while working, and the 27% bracket when your Long Term Gains become taxable (If you have any).

The 50 cent per dollar and 85 cent per dollar taxation of your Social Security benefits makes your tax rates far more complex. 10% and 12% become 15% and 18% at the 50 cent taxation level and 18.5% and 22.2% at the 85 cent taxation level. The thing you want to avoid is when the 85 cent per dollar taxation of your Social Security Benefits and your 22% Standard Tax Bracket combine to create a 40.7% Marginal Tax Bracket; which becomes 49.95% when LTCGs are taxed at the top end of the 12% standard bracket! And yes it even gets worse when you have to add in the 6.2% payroll tax if you get a part time job!

I don’t know your personal retirement income levels and the cost of your desired lifestyle, and I don’t want you to post it here, but you should talk to a tax accountant BEFORE you make your final retirement decisions to find out if you can avoid these insane Federal Marginal Tax Rates.

The longer you wait to retire, the larger your benefit, the higher the after tax income level can be before you start paying 40.7%, BUT, the longer you have to pay that ridiculous rate before it drops back down to 22%. You need to find a source of non-taxable retirement income and keep track on when you have to start using that income to avoid the absurd tax rates.
User avatar
galawdawg
Posts: 5231
Joined: Thu Dec 14, 2017 11:59 am
Location: Georgia

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by galawdawg »

I have my federal and state taxes withheld from my monthly pension, just like it was my paycheck. The way I calculate the amount I need to have withheld each year is to use my tax preparation software to run a "test" tax return for the year.

I make a copy of the data file of my final filed returns and call it something like "Test Tax Return-2021". I modify anything that will be different, such as any expected change to dividends in taxable, taxable investment sales, taxable IRA distributions, deductions and so on. Then I look to see what my basic tax liability for federal and state will be (ignoring any penalty). Then I divide my estimated federal and state tax liability by twelve each and that is what I have withheld from my monthly pension payments. If it is different than what I am already having withheld, I make the necessary adjustment on our pension plan administration website. I save the test return when I am finished.

While it uses the tax rates and tax laws from the previous year, so far this method has resulted in withholding that is very close to my actual tax liability for the year. If my plans change, I simply open the saved test return, modify whatever has changed, and see how that affects my tax liability. If needed, I again just adjust my monthly withholding either as a one-time adjustment or for the remainder of the year.

That may not work for everyone, but it works well for me!
RetiredAL
Posts: 3537
Joined: Tue Jun 06, 2017 12:09 am
Location: SF Bay Area

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by RetiredAL »

Here's how I've handled it.
1. I have some % of our SS withheld for the fed. Our State does not tax on our SS.
2. Rolled my Fidelity Workplace Plans into IRA's at Fidelity when I retired. I have a scheduled a monthly withdraw $ from an IRA. The online scheduling setup allow me to specify both Fed and State taxes to withhold.
3. If I manually withdraw additional from the IRA, I can specify how much to withhold for that withdraw.
4. My understanding was that if I had remained with the 401K, the withdrawal process, including taxes, was about the same as for an IRA.

I know for Fidelity or Schwab, that for a taxable account, you can set automatic withdrawals, but there is no provision for withholding taxes in the setup screen. Thus taxes due relating to a taxable account must be made from some other source or via estimated taxes.

Of note, at Fidelity, the manual withdrawal process was changed a year to 2 ago, so that now you can do a manual withdrawal tax withholding in such a fashion as to be quite similar doing estimated tax payments, using your withdrawal, by setting high withholding %, for both Fed and State (CA). I've not yet used it as such, but it appears to be a handy feature to true up the tax $ withheld just before year-end.
User avatar
Lee_WSP
Posts: 10401
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by Lee_WSP »

It's a matter of making quarterly payments. The simplest methods are automatic quarterly payments setup via the IRS website or a single one at the beginning of the year. There's other ways to skin the cat, but those are the simplest.
Broken Man 1999
Posts: 8626
Joined: Wed Apr 08, 2015 11:31 am
Location: West coast of Florida, near Champa Bay !

Re: So how does it work (paying taxes, etc) when living off 401K / IRA savings?

Post by Broken Man 1999 »

About one half of our expenses are paid via distributions from our TIRAs. I can send up to 99% of any distribution to the feds for taxes.

Easy to do, one is offered the ability when setting up any distribution to send some portion to the feds and some states.

I don't have taxes sent on every distribution, I true up a few times a year.

Broken Man 1999
“If I cannot drink Bourbon and smoke cigars in Heaven then I shall not go." - Mark Twain
Post Reply