AARP has a very good federal tax estimater. You can plug on your estimated amounts of income from your various sources of income and it will give you your estimated taxes. Then you can file quarterly payments with the IRS.
Its important to understand that under payment penalties do not apply to the entire tax liability. For example, if your tax liability is $30k and you only paid $28k in estimated taxes, the penalty is only going to apply to the $2K in underpayment. With the current IRS interest rate at 8%, it would be approximately $160. its more complicated than that, but that is the ballpark. Therefore, generally try to get your estimated payments close and then don't worry too much about it. You will not be paying a penalty on the full $30k.
Thank you James for clarify taxes in retirement. It is a complex topic for many of us that are used to just payroll taxes. We all cannot use your services, but we certainly appreciate your "coaching" regarding retirement. Again, thank you for sharing and making your expertise readily available.
Excellent video! We have income via social security, brokerage, IRA's and pensions. I do my own taxes using Turbo Tax and what I do after I file my taxes is to make a copy of the turbo tax file and edit the income, capital gains, etc. to get a picture of what our taxes will look like for the upcoming year so I can adjust our withholding as needed. As the year progresses, I will update the file with any major changes to make sure I am on top of it. I realize, that the tax laws and brackets change constantly, however, I do get a pretty good picture of what my liability will be and can take the actions to meet those liabilities early in the year.
Your term Average Tax Rate is typically called the Effective Tax Rate. For retirees who do their own income taxes using tax software, they can run a simulated income tax return. Although I am still working, I run a simulated tax return called Retired MFJ, and one titled Retired Survivor. The form can be updated intra-year so the correct taxes are withheld. I prefer to control the payment of income taxes through my tax-deferred accounts to cover the tax bill. As a result, I don't need to fill out multiple W-4s for Social Security and pension. In one brand of tax software, a report titled "Tax History" is automatically generated, which stores the last five years of income tax returns assuming you use the same software.
For taxes on a Roth conversion it is important to note that, if you pay the taxes from the conversion monies rather than using other outside funds, if you are under 59.5yo you will owe an additional 10% penalty on the amount of the conversion being withheld for taxes, since it is considered a non-qualified distribution paid to you indirectly to pay the taxes on the conversion.
This is useful high level information, but the tricky part in my opinion is actually calculating it and validating it against something to give you confidence that you did it correctly - especially when one has many different income sources. I have built a spreadsheet which works quite well, but I end up over estimating my taxes so that I get a refund. It would be helpful if there was some online template or resource that you could use…
Thank you James! That was very informative and helpful. We're not at retirement age, but it's really helpful to start thinking forward about how to navigate taxes when in the years approaching retirement.
Excellent and comprehensive video James. I love that you included Roth Conversions that that they should be paid via estimated payments than withholdings. Thanks again.
If the payments made exceed the amount of tax, then the amount of the overpayment is entered on the overpaid line in the Refund section of Form 1040. Taxpayers can choose to apply any portion of their overpayment to the following tax year or receive their refund as a check or direct deposit.
Wow. I have to be honest here: after watching this video James, I am struggling with a whole new dimension of anxiety; I had absolutely NO idea how complex the tax planning picture was going to be in retirement! I honestly thought it was going to be a simple, once-a-year thing just as it is now in my working years, but easier because the amounts would be less. I’m thankful to you for making me wiser, but this is truly depressing. So which is worse: the IRS’s “convenience” penalty each year, or the price I’ll have to pay tax strategists/planners to avoid it? What a rotten waste of one’s retirement time and resources to deal with! 😩
Excellent point on average/effective tax rate which is why it isn't a big deal to hit the end of that tax bracket exactly - a few thousand on either side of it is not the end of the world as it barely moves the effective tax rate.
Good topic! And as always, presented extremely well I know that one can never come close to covering any topic completely in a video, but I would have liked to have heard about the difference in timely payments between estimated tax payments and a tax withholding.
Good video and good topic. I retired about a year ago and have watched a lot of retirement videos from a lot of different people and estimated taxes are rarely covered. I'm still figuring out how it all works....was recently surprised that the second estimated payment was supposed to be in June and not July.
One advantage of a withholding during IRA conversion or distribution is that a withholding is counted as if it occurred evenly thruout the year. Be careful about penalties. Whenever trying to pay less than 110%, you find the rules have a lot of intricate details. If you don't pay evenly thruout the year, you have to document that your payments matched your income; if you don't pay the 110%, you had better be correct and owe less than $1000, or less than 10%, etc. or you'll pay penalty and interest. Of course, they don't pay you interest and give you a discount because you paid too much! The IRS has no sense of fair play - it's all about them getting their money and if they get some of yours as well, even better.
It is pretty easy to set up a spreadsheet that adds up your projected income and applies the IRS rules to calculate your tax. My spreadsheet has columns for actual income, qualified dividends, Federal taxable amount, state income, and MAGI, since each is calculated differently. Every time my income changes, I modify the spreadsheet and make a new projection. I have tax withheld from my SS check, and I withhold tax from my RMDs from inherited IRAs. Curiously, Fidelity won't allow you to withhold 100% of an IRA distribution, so I have to have 99% withheld.
Excellent information. If a 60 year old who's only income is from a traditional IRA and only pulls money out once per year in December and has taxes withheld. Will there be any penalties for not paying quarterly? Thank you.
One thing I would like to know…. What if you wait to make your IRA withdraws until the end of the year (to replenish your savings you have lived on). Say you withdraw 70K in December and have Fidelity withhold the taxes. Are you penalized because you didn’t make earlier tax payments?
I have struggled with estimating my taxes since retirement due to the issues you covered in your video. I wonder whether it would be okay to just withhold more from each IRA withdrawal to cover any under withholdings from interest, dividends and capital gains for the current year. For example, I estimate my 2024 tax liability to be 10k, and I know that most of my income came from my brokerage account and had no tax withholdings when withdrawn. I then make a withdrawal from my IRA of 20k with tax withholding set to 50%. Now I have 10k properly sent into the IRS. Would that comply?
In 2023 we owed no tax and got back all we paid at a p/t job but this year nothing has changed except I did a roth conversion and am paying the 10% quarterly but that extra income put us in a 1 time high income bracket.
MA is complicated as to how they tax IRA distributions. Since they do not provide a tax deduction on contributions, you only need to pay tax on the portion of the distribution that was not already taxed in MA. Easy you say, just get your basis from the firm. Not so fast. What if you made contributions in a year where you did not have any tax due.
Good video. Isn’t this as easy as simply withholding last year’s total federal and state taxes paid in a December IRA distribution? That way there are no estimated taxes to pay, you keep your money the full year, and you never pay a penalty. This assumes you are in the income range of only having to pay 100% of last year’s taxes to avoid a penalty.
James, I quit my job two months ago and plan to retire early. In my case, the income will be significantly less this year. Can I send an estimate 100% tax amount of last year's amount to the IRS on a "quarterly" basis? Then if the IRS determines that I am due a refund, they can send me the refund. If this method is possible, how can this be done?
And here we all thought taxes in retirement would be oh so simple... lol The big headache is with stocks our gains are hopefully nice and large. But, each stock is going to be different so your $5000 monthly withdrawal is going to be very lumpy depending on the mix you sell that month or quarter. The (hopefully) small basis is tax free and the larger gain is the taxable part. What's nice is we get to decide which one's to sell and we can sell the loser at the end of the year to cover some of those gains to save on some taxes too. Another thought is giving highly appreciated stocks to kids and charity vs selling them and giving them cash. Verify with them what makes the mosts sense since some of us have kids making more than us and they don't need the higher tax burden. Charities can sell without the tax burden which saves you the taxes on the gift. Thus with stock sales and dividends we need to pay a bit more attention to what's going on. Quarterly reviews seem to be the order of the day for those selling stocks or have large dividend and interest incomes.
You should make sure it is distributed equally at the quarterly due dates (or weighted towards the first couple quarters). You could still owe penalties if you underpaid the first quarter, but paid the full amount for the year. So if you don't know what your total tax bill is going be it is better to overpay by a couple percent in the earlier quarters, and then true up the last quarterly payment when you are much more confident in your total income.
@@jerrylabat550 If you realize, say on June 30, that you missed to pay estimated taxes for the first two quarters (deadline for 2nd quarter was June 15), in order to somewhat reduce your penalty, does it make a difference if you pay the underpayment right away on June 30 Vs waiting to pay it at the 3rd quarter deadline of Sep 15? or do you accrue additional penalty for the extra 2.5 months you waited? Thanks.
Just a quibble - a small portion of your IRA withdrawal may not be taxable if you had income about the limit and could not deduct your IRA contribution in a prior year. See IRS form 8606.
To achieve a secure retirement, aiming to save at least 15% of your income in a 401(k) is advisable. Online tools can assist in calculating the best savings strategy for you, considering factors like age and income. Consistently saving this percentage can help build your retirement fund effectively, thanks to the benefits of compound interest.
For me, I believe retirees who struggle to meet their basic needs are the ones who could not accumulate enough money during their active years to meet their needs. Retirement choices determine a lot of things. My wife and I both spent same number of years in the civil service, she invested through a wealth manager and myself through the 401k. We both still earning after our retirement.
it would be exactly the amount of money. you would be writing 8 additional checks and could lose track on what month you are on. What makes you say that paying every month is easier?
AARP has a very good federal tax estimater. You can plug on your estimated amounts of income from your various sources of income and it will give you your estimated taxes. Then you can file quarterly payments with the IRS.
thanks for this info.
Thanks - just checked it out and it looks like it will meet my needs!
I needed this but OMG why does it have to be so convoluted? 😂
Its important to understand that under payment penalties do not apply to the entire tax liability. For example, if your tax liability is $30k and you only paid $28k in estimated taxes, the penalty is only going to apply to the $2K in underpayment. With the current IRS interest rate at 8%, it would be approximately $160. its more complicated than that, but that is the ballpark. Therefore, generally try to get your estimated payments close and then don't worry too much about it. You will not be paying a penalty on the full $30k.
Thank you James for clarify taxes in retirement. It is a complex topic for many of us that are used to just payroll taxes. We all cannot use your services, but we certainly appreciate your "coaching" regarding retirement. Again, thank you for sharing and making your expertise readily available.
Excellent video! We have income via social security, brokerage, IRA's and pensions. I do my own taxes using Turbo Tax and what I do after I file my taxes is to make a copy of the turbo tax file and edit the income, capital gains, etc. to get a picture of what our taxes will look like for the upcoming year so I can adjust our withholding as needed. As the year progresses, I will update the file with any major changes to make sure I am on top of it. I realize, that the tax laws and brackets change constantly, however, I do get a pretty good picture of what my liability will be and can take the actions to meet those liabilities early in the year.
I like your idea. Thx a bunch!
I was thinking of doing that when the time comes. Good to hear, it’s working out for you.
If not the best video you ever did, certainly in the top 5. You just made a complex topic understandable. Thanks for all your hard work and expertise.
Your term Average Tax Rate is typically called the Effective Tax Rate. For retirees who do their own income taxes using tax software, they can run a simulated income tax return. Although I am still working, I run a simulated tax return called Retired MFJ, and one titled Retired Survivor. The form can be updated intra-year so the correct taxes are withheld. I prefer to control the payment of income taxes through my tax-deferred accounts to cover the tax bill. As a result, I don't need to fill out multiple W-4s for Social Security and pension. In one brand of tax software, a report titled "Tax History" is automatically generated, which stores the last five years of income tax returns assuming you use the same software.
Wow! I need a glass of wine after this discussion. Nothing is ever easy, is it? Thank you for the insight and the information.
For taxes on a Roth conversion it is important to note that, if you pay the taxes from the conversion monies rather than using other outside funds, if you are under 59.5yo you will owe an additional 10% penalty on the amount of the conversion being withheld for taxes, since it is considered a non-qualified distribution paid to you indirectly to pay the taxes on the conversion.
This is useful high level information, but the tricky part in my opinion is actually calculating it and validating it against something to give you confidence that you did it correctly - especially when one has many different income sources. I have built a spreadsheet which works quite well, but I end up over estimating my taxes so that I get a refund. It would be helpful if there was some online template or resource that you could use…
Thank you James! That was very informative and helpful. We're not at retirement age, but it's really helpful to start thinking forward about how to navigate taxes when in the years approaching retirement.
Excellent and comprehensive video James. I love that you included Roth Conversions that that they should be paid via estimated payments than withholdings. Thanks again.
One of the most helpful vids I've ever watched as I near retirement !!! Well Done !!
Thanks James for explaining how you can estimate your taxes during retirement. It was very informative and helpful!
Thanks for answering in so much detail. I also appreciate the comments from others. Thank you all for being helpful.
Thank you. This was a very clear explanation of a very complicated topic.
As always James, outstanding video. Thanks a lot for sharing your knowledge in this important topic for retirees.
As usual, James is coming thru with timely videos. Keep up the good work!!
Excellent presentation - clear and comprehensive
Very instructive. Excellent explanation. Congratulations on the show!
Huh. I never thought about this since for the past 45 years, it was all done for me by the company I worked for. Thank you for the heads up
Incredibly helpful- I’ve been stressing about this very thing!!! Thank you so much.
If the payments made exceed the amount of tax, then the amount of the overpayment is entered on the overpaid line in the Refund section of Form 1040. Taxpayers can choose to apply any portion of their overpayment to the following tax year or receive their refund as a check or direct deposit.
Excellent overview of a complex topic. Thank you very much!
Thank you for the information. This answers a lot of questions I had about this.
Wow. I have to be honest here: after watching this video James, I am struggling with a whole new dimension of anxiety; I had absolutely NO idea how complex the tax planning picture was going to be in retirement! I honestly thought it was going to be a simple, once-a-year thing just as it is now in my working years, but easier because the amounts would be less. I’m thankful to you for making me wiser, but this is truly depressing.
So which is worse: the IRS’s “convenience” penalty each year, or the price I’ll have to pay tax strategists/planners to avoid it? What a rotten waste of one’s retirement time and resources to deal with! 😩
Excellent point on average/effective tax rate which is why it isn't a big deal to hit the end of that tax bracket exactly - a few thousand on either side of it is not the end of the world as it barely moves the effective tax rate.
Thank you very much for such detailed information, most helpful video I've found on TH-cam regarding this topic.
That was an eye opening experience to say the least
Good topic! And as always, presented extremely well
I know that one can never come close to covering any topic completely in a video, but I would have liked to have heard about the difference in timely payments between estimated tax payments and a tax withholding.
Good video and good topic. I retired about a year ago and have watched a lot of retirement videos from a lot of different people and estimated taxes are rarely covered. I'm still figuring out how it all works....was recently surprised that the second estimated payment was supposed to be in June and not July.
One advantage of a withholding during IRA conversion or distribution is that a withholding is counted as if it occurred evenly thruout the year.
Be careful about penalties. Whenever trying to pay less than 110%, you find the rules have a lot of intricate details. If you don't pay evenly thruout the year, you have to document that your payments matched your income; if you don't pay the 110%, you had better be correct and owe less than $1000, or less than 10%, etc. or you'll pay penalty and interest. Of course, they don't pay you interest and give you a discount because you paid too much! The IRS has no sense of fair play - it's all about them getting their money and if they get some of yours as well, even better.
Excellent lesson, I had to figure out most of this myself.
Great tax discussion, our system is unnecessarily complex!
This was outstanding and very helpful!! Thanks.
Thank you, James. Very Informative video. Can you make a video about Option Overlay? Is this a good investment strategy for IRAs?
Thanks James, great job!
It is pretty easy to set up a spreadsheet that adds up your projected income and applies the IRS rules to calculate your tax. My spreadsheet has columns for actual income, qualified dividends, Federal taxable amount, state income, and MAGI, since each is calculated differently. Every time my income changes, I modify the spreadsheet and make a new projection.
I have tax withheld from my SS check, and I withhold tax from my RMDs from inherited IRAs. Curiously, Fidelity won't allow you to withhold 100% of an IRA distribution, so I have to have 99% withheld.
Excellent information. If a 60 year old who's only income is from a traditional IRA and only pulls money out once per year in December and has taxes withheld. Will there be any penalties for not paying quarterly? Thank you.
Thanks for the video!
One thing I would like to know…. What if you wait to make your IRA withdraws until the end of the year (to replenish your savings you have lived on). Say you withdraw 70K in December and have Fidelity withhold the taxes. Are you penalized because you didn’t make earlier tax payments?
I have struggled with estimating my taxes since retirement due to the issues you covered in your video. I wonder whether it would be okay to just withhold more from each IRA withdrawal to cover any under withholdings from interest, dividends and capital gains for the current year. For example, I estimate my 2024 tax liability to be 10k, and I know that most of my income came from my brokerage account and had no tax withholdings when withdrawn. I then make a withdrawal from my IRA of 20k with tax withholding set to 50%. Now I have 10k properly sent into the IRS. Would that comply?
I assume that if you overpay on the 90% or 110% that you get that back as a refund.
In 2023 we owed no tax and got back all we paid at a p/t job but this year nothing has changed except I did a roth conversion and am paying the 10% quarterly but that extra income put us in a 1 time high income bracket.
MA is complicated as to how they tax IRA distributions. Since they do not provide a tax deduction on contributions, you only need to pay tax on the portion of the distribution that was not already taxed in MA. Easy you say, just get your basis from the firm. Not so fast. What if you made contributions in a year where you did not have any tax due.
Good video. Isn’t this as easy as simply withholding last year’s total federal and state taxes paid in a December IRA distribution? That way there are no estimated taxes to pay, you keep your money the full year, and you never pay a penalty. This assumes you are in the income range of only having to pay 100% of last year’s taxes to avoid a penalty.
110% of previous year may apply. Also overpaid and still was fine due to the distribution of payments…..
Hi can you make a video on teacher pension in NEW YORK pay tax
I just sold a property and I have capital gains. Will that be figured put at tax tome or should I estimate the pmt?
James, I quit my job two months ago and plan to retire early. In my case, the income will be significantly less this year. Can I send an estimate 100% tax amount of last year's amount to the IRS on a "quarterly" basis? Then if the IRS determines that I am due a refund, they can send me the refund. If this method is possible, how can this be done?
go to irs.gov/payments - easy peasy
And here we all thought taxes in retirement would be oh so simple... lol
The big headache is with stocks our gains are hopefully nice and large. But, each stock is going to be different so your $5000 monthly withdrawal is going to be very lumpy depending on the mix you sell that month or quarter. The (hopefully) small basis is tax free and the larger gain is the taxable part. What's nice is we get to decide which one's to sell and we can sell the loser at the end of the year to cover some of those gains to save on some taxes too.
Another thought is giving highly appreciated stocks to kids and charity vs selling them and giving them cash. Verify with them what makes the mosts sense since some of us have kids making more than us and they don't need the higher tax burden. Charities can sell without the tax burden which saves you the taxes on the gift.
Thus with stock sales and dividends we need to pay a bit more attention to what's going on. Quarterly reviews seem to be the order of the day for those selling stocks or have large dividend and interest incomes.
You said you're good if you hit safe harbor amounts. But when does that amount need to be paid by?
You should make sure it is distributed equally at the quarterly due dates (or weighted towards the first couple quarters). You could still owe penalties if you underpaid the first quarter, but paid the full amount for the year. So if you don't know what your total tax bill is going be it is better to overpay by a couple percent in the earlier quarters, and then true up the last quarterly payment when you are much more confident in your total income.
@@jerrylabat550 If you realize, say on June 30, that you missed to pay estimated taxes for the first two quarters (deadline for 2nd quarter was June 15), in order to somewhat reduce your penalty, does it make a difference if you pay the underpayment right away on June 30 Vs waiting to pay it at the 3rd quarter deadline of Sep 15? or do you accrue additional penalty for the extra 2.5 months you waited? Thanks.
I miss your charts.
Just a quibble - a small portion of your IRA withdrawal may not be taxable if you had income about the limit and could not deduct your IRA contribution in a prior year. See IRS form 8606.
To achieve a secure retirement, aiming to save at least 15% of your income in a 401(k) is advisable. Online tools can assist in calculating the best savings strategy for you, considering factors like age and income. Consistently saving this percentage can help build your retirement fund effectively, thanks to the benefits of compound interest.
For me, I believe retirees who struggle to meet their basic needs are the ones who could not accumulate enough money during their active years to meet their needs. Retirement choices determine a lot of things. My wife and I both spent same number of years in the civil service, she invested through a wealth manager and myself through the 401k. We both still earning after our retirement.
Pre-paying taxes on a new credit card is one way of meeting a sign-up bonus to get a huge injection of frequent flier points.
ACA impact is a big deal. See James' other video on taxes and effects of Roth conversions on ACA subsidy. th-cam.com/video/GWKoNe-MBWI/w-d-xo.html
wow I had no idea there's a penalty for paying your taxes when you actually file your taxes.
Also, very bazaar that you get hit with penalties even as you prepay taxes
Can you pay the IRS estimated payments monthly? That's easier than a big check every 3 months or so.
it would be exactly the amount of money. you would be writing 8 additional checks and could lose track on what month you are on. What makes you say that paying every month is easier?