Questions on witholding and taxes on a SEPP
L1: Questions on witholding and taxes on a SEPP
My questions are on taxes and withholding on the yearly withdrawals.
I’m looking to begin my SEPP in the next 3-4 months. I was born 11/1966 and will be using $360k residing in a 401k at Vanguard from a former employer. I plan to use the amortization method and I want to take the entire yearly sum in one payment.
Am I correct that we have a choice of either having 20% withheld and paying the taxes due by 4/15/xx the following year (the usual way) OR choosing no withholding and file/pay quarterly taxes instead? Is this correct?
I would prefer to not have to do quarterly filings. Do I have a choice in the matter?
2018-05-16 04:32, By: MrOrange, IP: [18.104.22.168]
L2: Questions on witholding and taxes on a SEPP
You could be subject to penalties and interest on underpayment of estimated taxes if your 2018 payments are not at least 100% of your 2017 tax liability, unless your 2018 tax liability is less than your 2017 tax liability. So, you should project your 2018 tax liability, and the timing of your SEPP distributions. You have to include your other 2018 taxable income in your calculations.
If you withhold all of the taxes related to the SEPP distribution, then it should avoid the penalty and interest. If you decide to make an estimated payment, it will be due 6/15 if the distribution is made before 5/31, or it will be due 9/15 if the distribution is made in June, July, or August. If the distribution is made after 8/31, then the estimated payment will not be due until 1/15/2019.
You will have to look at your tax rate. If you are in the 22%, 24%, or 32% tax brackets, then withholding only 20% could subject you to penalties and interest. It is important for you to use some 2018 tax projection program to minimize or avoid any issues. If you do not have a program available, then hire a tax professional who can do the calculations for you, especially if you are an employee in 2018, because the new IRS withholding tax tables so far have no relationship to reality at this date.
2018-05-16 04:58, By: dlzallestaxes, IP: [22.214.171.124]
L3: Questions on witholding and taxes on a SEPP
Wow – fast reply!
My/our tax rate should be in the 12% realm with or without the SEPP distribution for 2018 and most likely well beyond. Based on the 12% rate I should be safe filing taxes via the standard timeframe (4/15/xx) instead of quarterly estimated filings right? I don’t want to give the IRS any reason to claim I busted the SEPP.
The main reason for starting the SEPP now is our current income (wife’s income ~$32k with all taxes withheld normally) with no way to currently increase it due to my physical limitations.
I still need to contact Vanguard to be sure things can be done through them as I want things done. From what I’ve read on this forum Vanguard does withhold the 20% upon request but I want to confirm this before I finalize things.
Your advice is greatly appreciated!
2018-05-16 05:33, By: MrOrange, IP: [126.96.36.199]