Avoiding Estimated Tax Penalty - Safe Haven

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Carolina Shagger
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Avoiding Estimated Tax Penalty - Safe Haven

Post by Carolina Shagger » Mon Jun 11, 2018 11:26 pm

I think I have this right but I want to run it by the Bogleheads to make sure.
For the ET safe haven I believe there will not be any penalty if: a) you pay a total of 100% of the previous year’s tax liability (110 % if your AGI is over $150,000) and b) you make 4 equal estimated tax payments. I also understand that the IRS considers any withholding as though it was made throughout the year unless you decide otherwise.
Now that I am more or less retired my income consists of social security, a pension, dividends and capital gains from my non-tax advantaged investments and my RMD’s from two IRA’s (one of my own and one inherited). I have very little withholding from my pension and none from my non-tax advantaged accounts. Can I make some relatively small estimated tax payments and then have Vanguard withhold the proper balance (which I could easily calculate) from my RMD’s if I take them in December? The Vanguard representative I spoke with said I could specify any amount I wanted withheld from my RMD’s. This seems like an easy way to avoid the penalty as well as keep my money working as long as possible.
Your comments please. Thanks.

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FiveK
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by FiveK » Mon Jun 11, 2018 11:58 pm

If you can withhold enough from the RMD, that will work.

Rather than making estimated tax payments during the year (are you doing this because you can't withhold enough from the RMD alone?), it might be simpler to withhold more from the pension.

lstone19
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by lstone19 » Tue Jun 12, 2018 9:25 am

While as someone else has claimed elsewhere on this site, the description of the safe haven requires equal estimated payments, the actual penalty calculation on Form 2210 does not. So if later in the year you find withholding is higher than you first expected, you can reduce the estimated payments. So long as each quarter’s YTD estimated payments plus the appropriate percentage of the year’s withholding is more than the YTD required payment (the 100% or 110% of last year), there will be no penalty.
Last edited by lstone19 on Tue Jun 12, 2018 9:39 am, edited 1 time in total.

ResearchMed
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by ResearchMed » Tue Jun 12, 2018 9:37 am

Carolina Shagger wrote:
Mon Jun 11, 2018 11:26 pm
I think I have this right but I want to run it by the Bogleheads to make sure.
For the ET safe haven I believe there will not be any penalty if: a) you pay a total of 100% of the previous year’s tax liability (110 % if your AGI is over $150,000) and b) you make 4 equal estimated tax payments. I also understand that the IRS considers any withholding as though it was made throughout the year unless you decide otherwise.
Now that I am more or less retired my income consists of social security, a pension, dividends and capital gains from my non-tax advantaged investments and my RMD’s from two IRA’s (one of my own and one inherited). I have very little withholding from my pension and none from my non-tax advantaged accounts. Can I make some relatively small estimated tax payments and then have Vanguard withhold the proper balance (which I could easily calculate) from my RMD’s if I take them in December? The Vanguard representative I spoke with said I could specify any amount I wanted withheld from my RMD’s. This seems like an easy way to avoid the penalty as well as keep my money working as long as possible.
Your comments please. Thanks.
We do this regularly, having withholding taken from IRA and 403b RMD's and other distributions, in late November or early/mid-December.
Then we don't have to worry about filing any quarterly for 1099 income.
We have some extra withheld from regular monthly income, but we usually need to top it off.
When DH is fully retired, we'll probably do all taxes via withholding from distributions.

Note that in some states, Vanguard will NOT withhold state taxes, so that could be a problem.
Our state is one of those, so for that reason, we do it through TIAA (403b) and Schwab (IRA) distributions, not Vanguard.

RM
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tomd37
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by tomd37 » Tue Jun 12, 2018 9:58 am

Shagger - I have been told several times by my Flagship Rep that federal tax withholding from a RMD has to be a percentage amount and it cannot be less than 10%. It cannot be a specific dollar amount according to him. I take my RMD in September and by then have already figured out how much I need to withhold for federal tax so as to come close to either owing a small amount (preferable) or getting a small refund. I have been doing this for ten years now. I also take advantage of qualified charitable distributions (QCD) to lower my taxable income on line 15b of my Form 1040.
Tom D.

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Epsilon Delta
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by Epsilon Delta » Tue Jun 12, 2018 11:13 am

For an IRA withdrawal you can specify zero withholding, you can also specify anything from 10% to 100%. You just can't specify 1% to 9% withholding.

Also you can take as many distributions as you like so if you want an exact dollar amount, make a withdrawal of that amount and withhold 100% and then withdraw the rest a day later withholding 0%.

There is nothing special about RMDs in this respect. Vanguard does not know that a withdrawal is an RMD since they know nothing about prior withdrawals from other custodians. If there is something broken about Vanguards RMD calculation service that prevents this don't use it.

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GerryL
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by GerryL » Tue Jun 12, 2018 12:12 pm

Epsilon Delta wrote:
Tue Jun 12, 2018 11:13 am
For an IRA withdrawal you can specify zero withholding, you can also specify anything from 10% to 100%. You just can't specify 1% to 9% withholding.

Also you can take as many distributions as you like so if you want an exact dollar amount, make a withdrawal of that amount and withhold 100% and then withdraw the rest a day later withholding 0%.

There is nothing special about RMDs in this respect. Vanguard does not know that a withdrawal is an RMD since they know nothing about prior withdrawals from other custodians. If there is something broken about Vanguards RMD calculation service that prevents this don't use it.
This is very useful information because I, too, have been planning to use RMD withholding for all of my income tax payments. Fortunately my state is covered by Vanguard. Will need to figure out the best way to make this technique work with both fed and state taxes.

Carolina Shagger
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Re: Avoiding Estimated Tax Penalty - Safe Haven

Post by Carolina Shagger » Tue Jun 12, 2018 8:37 pm

Thank you for all your comments.
Perhaps I misunderstood my Vanguard representative regarding withholding. In any case as has been pointed out I can take multiple bites of the RMD apple to get the proper amount of withholding or just calculate the correct percentage, as long as it is over 10% (it will be). At this point I will continue to make equal estimated tax payments although as pointed out apparently it isn’t necessary. I don’t want to rock the boat (the cautious side of me coming out).
Next year I will not be making much in the way of estimated tax payments, if at all, and will be having the required amount withheld from my RMD’s. This certainly seems to fly in the face of a pay as you go taxation system. But I guess this is one of the benefits of being old and using the RMD’s to my advantage.
Again thank you for your insights.

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