Starting a new 72T next month

Hi Christian, I checked your calculation using an AFR of 5% and life expectancy of 31.6, and the results agreed with your monthly amount of $19,423.42. Good luck!

My only comment is that I would advise you to significantly increase your withholdings, rather than do quarterly estimates. You will be in the 24% tax bracket. Withholding at 10% and submitting the difference quarterly might seem like a good idea, while investing the $ 3,000/month difference. But if you miscalculate any of your estimates, or are late, there will be underestimate penalties. On the other hand, withholdings are calculated for the entire year, and minimize or avoid the penalties and interest. Under any circumstance, your 1/15 estimate should be a catch-up to either 110% of your prior year tax liability, or close to your calculated projection of your current year liability.

Thank you both!  That's a great idea about increasing the withholding.  Is that a change I can make later without breaking the SEPP?  It seems like increasing the amount the government gets doesn't change the amount I'm taking out, so it might be okay.

Thanks again!

Christian

You should be able to adjust the withholdings at any time. But, you would have to check that with the broker or financial institution. When you contact them, find out if you can make the change online, or if you must submit paperwork, and how far in advance of a distribution that you have to submit it. 

Also, you might want to consider increasing the withholding to take into consideration all of your taxable income, and then you won't have to be concerned about doing any estimated payments, except maybe one in January each year, especially if you have large Capital Gain Dividends (if/when the stock market turns around !!!).

P.S. Congratulations on having accumulated such a large IRA at age 54. You invested astutely.

BTW, starting a SEPP 72-T at your age will dovetail perfectly with the 5-year/age 59 1/2 timeframe. 

Thank you for your help!  I have been fortunate in the markets!

I use a site at https://us.icalculator.info/salary-calculator/florida.html

to estimate the amount of taxes I will owe (I'm in Florida).  They have detailed out Social Security and Medicare amounts as well as the Federal Income Tax.  Since I'm not working, should I be budgeting for SS and Med as well as income tax out of the SEPP withdrawals?

I assume yes, but I thought it was worth asking.  Hope springs eternal!

Thank you,

Christian

I am confused by your comment "should I be budgeting for SS and Med as well as income tax out of the SEPP withdrawals?" At first I thought that you were asking about increasing your tax withholdings from your SEPP 72-T to cover the tax on your SS Benefits. Then i realized that you were 54, and not eligible for SS Benefits until you will be at least 62 (bad idea), 67 (better idea), or 70 (best idea). Unless you are on SS Disability.

If you are already on SS, or whenever you will be on SS, realize that 85% of the GROSS SS BENEFITS are taxable. Medicare premiums reduce the net check, and have nothing to do with income taxes.

If or when your are on SS, have your federal (and state if applicable if you move out of Fla) income taxes withheld from your SS benefit checks monthly.

Maybe Christian's question is whether SS and Medicare taxes (7.65%) are withheld from retirement distributions - and the answer is no. SS and Medicare taxes are only payable on earned income, not retirement distributions.

While you won't be paying the SS/Medicare taxes, you will have another additional expense to consider: health insurance. At an annual distribution/salary of over $200,000 per year, you won't be eligible for the government subsidy to the ACA (aka Obamacare), if that's where you plan to get your medical insurance from. Non-subsidized ACA and private insurance are much more expensive than a subsidized ACA plan. And the ACA doesn't include dental or vision insurance, so you will pay for them separately. 

If that is where Christian is coming from, it is hard to believe that at $ 240,000 per year for his SEPP 72-T distributions minus say $ 40,000 in withholdings, that he is concerned about affording Health Insurance.

I'm not on SS right now.  I stated the question poorly.  Tracy, I was trying to ask,  "When I send in my estimated taxes to the IRS, do I need to send enough to cover the (roughly) $9,000 in SS and $8,000 in Medicare that would normally come out of a paycheck?"  You answered that it's not part of retirement distributions - so that's good news!  

As to Health Insurance, I still have a college age daughter on my plan and the cost is significant.  I'm paying (health, dental, vision) $2,262.09 / month (About $27K/year).  You are right, that I do not qualify for any subsidies.  We are planning to look again in the fall.  But the cost probably won't come down much until my daughter falls off the plan sometime next summer.

Thank you both!  Very helpful indeed!

Christian

I understand. You were asking about the payroll taxes for SS/FICA (6.2% to a maximum of $ 8,854 in 2021) and Medicare Tax (1.4% with no limit). As already answered, the distributions from your IRA are not subject to any "payroll taxes", but are subject to federal (and state elsewhere) income taxes either by withholdings from the distributions, or by estimated tax payments. Is your life-style and financial needs really in the $ 200,000 range (after taxes) ? Will it come down significantly when your college age daughter graduates ? (When will that be -- before you are 59 1/2 ?)

Maybe you should consider not putting all of your IRA into the SEPP 72-T, and set it up for the amount that you need after she graduates. You might then just take the amounts that you NEED until then, even if you would be subject to the 10% penalty. This takes a lot of planning, probably with a professional tax or financial advisor.

Based upon your posting, I have to assume that you do not have non-retirement accounts or do not want to use a HELOC (Home Equity Line of Credit) for part of your needs for the 5+ years until you are 5 1/2.