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This post is an extension of Rick’s and Richard’s recent posts regarding taxes in retirement.
A recurring issue I dealt with as a tax preparer was calculating a (unpleasant) surprise the first year that someone retired. While working, the employee typically gets a paycheck with adequate tax withholding. When he leaves the job behind for the greener pastures of retired life, things can get a little more complicated. Now, instead of a single W2 to deal with, there may be forms from Social Security, pension(s), IRA distribution(s), and if they’re unlucky enough to have a commission hungry financial rep, multiple forms from annuities and K1s. If married, the forms may double in number. It was also very common for people not to realize some of their SS could be taxable.
So this is a cautionary post for those approaching retirement. Schedule an appointment with your tax preparer, or if you are a DIYer, use one of the tax calculators, or prepare a dummy tax return on your software in order to calculate your approximate tax liability.
Especially if there are lots of 1099s, I find it easier to not do any withholding, and instead arrange quarterly estimates for both federal and state taxes. I put these on autopilot (direct debits) from my checking, though many people prefer doing it the old fashioned way, by writing checks and mailing them in each quarter.
Great article, lots going on. I am 80 years old never made a quarterly payment. Here is my method, my RMD is done in Nov of each year. I have been doing my taxes since I have been 16. Currently I have developed a spreadsheet that mirrors Turbo Tax but just for my situation. I compare everything to the previous year. My entire withholding is taken from my RMD and in round numbers is 22% Fed, and 5% state. My method has avoided taxes for every year and I try to pay so I have a very small payment or small refund. I like to push the numbers, so at age 80, I take the maximum RMD without going into a higher tax bracket. As an engineer, I like to push the numbers.
You have an oxymoron (maximum required minimum distribution). I think you mean maximum distribution. Good strategy–I’m doing this for my mother-in-law.
This way that extra distribution above the RMD will be tax-free to her heirs instead of taxed as ordinary income.
I’m interested as to how you do the direct debit from checking. Can you explain? I’ve done it online, but not scheduled in advance. Is it just a matter of setting the scheduled date in the future?
For my part, I both pay the safe harbor amount, or more if I anticipate a bigger bill, and advise others to do so–right when we file the 1040 for the previous year. That eliminates withholding and forgetting both.
On the other hand, I also like and have used IRA withdrawals dedicated to taxes, often when I’m doing tax planning around November.