How to calculate tax withholding in retirement
HTML-код
- Опубликовано: 12 янв 2025
- How much tax to withhold from your retirement income sources is common question. It's confusing because most tax payers pay a blended tax rate and deductions also make things fuzzy. This video describes how you can calculate your actual tax rate and translate that into the correct withholding amount from IRA distributions, Social Security and pensions. And, yes those are my kids screaming for me at the very end..."DAD!!!!" LOL. 😆
👉 My professional focus is retirement planning for individuals age 55+. Please visit my website or reach out for a conversation. Thanks for watching! 😀
Ted Erhart, CFP®
Financial Planner
Anoka, Minnesota
www.norrislakeretirement.com
/ ted-erhart-cfp%c2%ae-4...
www.facebook.c...
Norris Lake Financial Planning is a SEC registered investment advisor able to conduct advisory business in states where it is registered, exempt or excluded from registration. All contents contained herein should not be construed as an offer or solicitation for investment advice or for the offer or sale of any security, insurance or other investment product. Data contained here is obtained from believed reliable sources, however, cannot be guaranteed. Investments contain a risk of loss. Please consult a qualified legal, tax or accounting professional before implementing any investment or strategy discussed.
![Noob To Max With DRAGON REWORK In Blox Fruits [FULL MOVIE]](http://i.ytimg.com/vi/LnBMOinoOvA/mqdefault.jpg)
Related video 👉HOW SOCIAL SECURITY IS TAXED: ruclips.net/video/cbiAtETn_TA/видео.htmlsi=9ctRpLRhZxMmVoEM
Simple, I use a tax program every year to do my tax return. It cost between 40 and 50 dollars. As soon as I finish it, I'm able to figure out my tax picture for the next year and can easily adjust it as I go through the year. I just use the current program. Nothing complicated. I've been doing this for many years and it works like a charm.
It took me a long time to figure this out and I use a spreadsheet to do it every year. If you throw dividends in the calculation it gets even more complicated especially since some of them are non-qualified (basically interest). Using the prior year really helps as you mentioned. I now use our IRA RMD EOY distribution (100%) to pay the IRS and the rest comes out of quarterly tax payments. So, only one withholding. Thanks very much!
I’m not an AARP fan because of their liberal leaning. Despite that, the have a great income tax estimator. Very detailed.
@@thomasmccabe3066 Thanks for the tool tip. Will check it out.
Excellent review
Thank you, this was helpful….
AARP provides a free tax estimation calculator online. It's simple but in depth enough to account for various types of income including tax adjusted SS calculator and other specified withholdings. Once you estimate your total tax liability, it provides an input for the estimated tax payments. Just simply take the amount of tax owed, divide by 4 quarters for estimated withholding payments owed. Caution!!! The IRS checks to see if there is a withholding penalty due for inadequate quarterly payments. For example, if the total annual estimate due is $20K and the first three payments total $3K, they will consider the withholding payment inadequate unless you can prove the tax liability incurred for the first three quarters was actually $3K and the tax liability for the final quarter was $17K. The IRS assumes income to accrue more evenly across the year and expects the estimates to reflect the same. Underpayment penalties are severe and the additional filing requirements are even more onerous. This can come into play where a retiree takes a single distribution from an IRA or other pre-tax account during the year. The quarterly tax estimate should reflect when the distribution is taken.
As Rod Hardin stated the " IRA RMD EOY distribution (100%) to pay the IRS " is a safe solution. I would add that over paying your taxes due is safer than under paying. And the IRS taking time to issue a refund will pay you interest mean while.
@bethdxn2236 I'm not an accountant, but I believe your explanation is wrong. I believe the IRS does match quarterly income with quarterly estimated tax payments, but withholding is different, and is not matched by quarter. I believe you can satisfy your entire tax obligation with a December IRA distribution for which withholding is sufficient to satisfy the total tax obligation for the year (including that owed on the December distribution itself). Using your example, if your total tax liability is $20K (before the December IRA distribution), you can request an IRA distribution of $20K, plus the tax that would be owed on the distribution itself. So if a $23K IRA distribution would generate a $3K tax liability, request a $23K distribution and have it all withheld. $20K will satisfy your tax obligation prior to the distribution, and $3K will satisfy the tax on the $23K distribution. (Numbers are for example only. Your tax obligation on a $23K distribution probably will be something other than $3K, so you will have to run the numbers for your own situation, but the concept is valid.) Check with your accountant for confirmation, but I am sure I am right. I have seen it somewhere in the 1040 instructions and confirmed it with my accountant.
Nicely done. TY
Thanks for watching!
Are there any issues to worry about when it comes to the timing of the tax payments? Can those just be split into 4 equal amounts, or do they need to be paid proportionally to the income that is withdrawn?
Great article, thank you for the information!
Great video!
Great video. Thank you!!
Glad it was helpful! 😀
I find it easier to just use quarterly estimated tax payments - it can be done on line with the IRS direct from the bank account - rather than trying to adjust withholdings every year. Also one can just make sure to pay 100% to 110% of your last years tax (divided into 4 the quarterly installments) to avoid a penalty if you misfigure. You just need to remember to do it.
Thanks for your comment. I was thinking about doing a video regarding the safe harbor rules and paying estimates. Sometimes they cause problems for people when they take a large capital gain or IRA distribution that is a one-off. Then the next near, they are paying large quarterly estimates for income that won't be there. It's tricky for people without some tax knowledge to navigate but your point is well taken.
Yes, that's what I've done. At the very least, I would avoid the possibility of any penalties for underpayment of tax, even if I owe an additional amount when filing my return.
@@TedErhartCFP this would be really helpful (I watch a lot of CFP content and don't think I've ever seen safe harbor, quarterly estimates etc covered in any detail) e.g. if we sell our primary home and/or do Roth conversions how should we think about that in the year of the sale as well for the following year? Thanks.
Agree on quarterly payments. It was always a pain to coordinate withholding from pension, social security, interest, dividends, Roth conversion, and now RMDs. The pension had a "simple" calculator that made it very difficult to factor in other income and Social Security withholding requires using certain set percentages. This year I've stopped all withholding and am paying taxes through quarterly payments. I was surprised by how easily this was accomplished. I could estimate my tax obligation, as Ted suggests in his excellent video, but find it more straightforward (for me) to simply withhold my previous year's tax obligation and thereby stay in a safe harbor. As usual - good video.
Did anyone hear my kids screaming in the background in the last 10 seconds?! "DAD!!!" 😆
They were just upset the video was over, they wanted to hear more about tax withholding in retirement
Ha! 😅
No
There is a website where we can go to set up our quarterly tax payments. I can’t find it. Would you share the link?
That real tax rate is your “effective” tax rate. My tax expert has that number on the bottom of the first page showing the recent year and the previous two…for comparison. That’s the most important tax number for me.
I'm glad you mentioned effective tax rate. In the tax world, "effective tax rate" is typically calculated by dividing total tax into "taxable income." The problem with this is taxable income is a net, after deductions, figure. When retirees are choosing a withholding percentage on IRA distributions or pensions, for example, they are doing so on a gross (before deductions) basis. We're getting deep into the weeds here but this is one reason I created the video. If someone uses "effective tax rate" the way it is normally calculated, they'll end up choosing a withholding percentage that is higher than they need.
Why would you not use the taxable calculation of AGI + 50% SS = Combined Income and then you calculate the tax as %50 of the difference of CI - $25k + 35% of the difference of CI - $32k, i f you calculate his taxable amount this way it would be CI = $78k ($63k + 50% of 30K) so doing the final calculation 78-25 = 53 x .5 = 26.5 and 78-32 = 46 x .35 = 16.1 so his total income on line 11 is $42,600 not $88,500 and his taxable income on line 15 is only $28,000!
As a simple citizen, way too stupid...took about 3 years into retirement to get it close. Either had to pay or to much refund.....never can just break even.
He needs a good forward looking tax plan wherein he now fills the 22% bracket with Roth conversions so that later he can duck under the worst of the SS tax torpedo.
Must be nice to have to worry about taxes in retirement.
Maybe this needs to be explained a little deeper. I'm not seeing how provisional income is being factored in.
The comment that you can just withhold 12% from each of your income sources is valid ONLY if you do not have Medicare premiums deducted from your Social Security benefit distribution. The example shown of a 62 year old obviously does not fall into that category. The Social Security administration allows you to withhold from your distribution, but only 7, 10, 12 or 22%. Sounds like withholding 12% would be no problem, however the Social Security administration makes it unnecessarily complex. If your monthly benefit is $2000 before deductions, which is the amount on which your tax is calculated, you would think that a 12% withholding would be 12% of $2000, or $240. However, that's not how they do it! Let's say your Social Security benefit is $2000 per month, your Medicare Part B premium is $185 per month, and the Part D premium is $41 per month, and you want to withhold 12%. They deduct the $185, and the $41, resulting in $1774, and then withhold 12% of $1774, or $212.88, not the $240 that you would logically expect. Over the course of a year, your deductions would be $325 less than you would expect. If you also take distributions from an IRA, it is much, much easier to calculate your entire estimated tax liability and have all of it withheld from your IRA distributions. If you need a relatively easy way to calculate what your tax liability is, do a Google search for "1040 Excel". It calculates how much of your Social Security is subject to tax, as well as all your other income. Highly, highly recommended! (It allows you to enter a withholding amount from Social Security, but unfortunately it will not calculate the withheld amount based on the SS withholding choices and the Medicare premium deductions.)
Great points. Thanks Joe!
You are absolutely correct. I recently contacted the SS administration in order to start having voluntary fed taxes withheld from my monthly distribution. When he read back the numbers to me, I realized it wasn't a percentage of the gross payment but rather the net payment (after parts B and D are deducted).