L1: taxesHello , I read with great interest the recent long discussion about allowing the institution to withhold taxes from the 72T withdrawal. In my case, I withdraw the whole yearly distribution as a single distribution in January. I carefully estimate the taxes due and allow Schwab ( love them) to withhold an amount for taxes that is very slightly above my estimate. My question: Is the risk for problems primarily with folks who take monthly distributions and/or payments very late in the year???? Since mine is so simple, ie one payment early in the year, would I be at a relatively low risk for problems??? Thank you sooo much..2010-10-11 01:02, By: TheresaM, IP: [126.96.36.199]
L2: taxesThe main risk regarding withholding on 72t plans is that there could be a communications mixup with thecustodianbetween the gross and net distribution amounts. The gross amount is the only amount the IRS cares about with respect to the 72t plan, but the withholding is only material to your meeting the requirements to avoid underpayment penalties.
The only risk that exists in your case is that you are receiving the net amount you will have to live on up front in January, so your budgeting of expenses has little room for error. In addition, your withheld amount goes to the IRS so you lose the flexibility of using those dollars to prevent you from busting the plan. In other words, if you fall short of money late in the year, instead of not paying your last two quarterly estimates to help you avoid busting the plan, you are stuckcompromising the safety of your plan for avoiding an underpayment penalty. Given the choice, the underpayment penalty with an interest rate of 4% is much less than the cost of a busted plan.
But as long as your net distribution is sufficient for you, and the custodian follows your instructions, you will be OK.
2010-10-11 03:12, By: Alan S., IP: [188.8.131.52]
L3: taxesThanks for your reply in this matter. I realize the risk in getting all the distribution in January. I have an “emergency fund” in a taxable account for emergencies that equals a full year of expenses, and if that fails I can go back to work. I am a nurse, so there is always a place to work. Thanks again…2010-10-11 03:34, By: TheresaM, IP: [184.108.40.206]
L4: taxesThe only “problem” I see with your plan is the “lost opportunity costs” to earn interest or growth on the taxes withheld by Schwab bypaying the whole year’s taxes up front. Remeber, withholding too much is an “interest-free loan” to the government.
This is like the person who knowingly “over withholds” taxes from their regular paycheck so they get a larger refund when they file their tax return. They happily … and very mistakenly … gloat about not paying taxes simply because they got a very large refund, while failing to simply look at Page 2 of IRS Form 1040, middle of the page for the line that tellsthem the total of their taxes for the year.
I assume that you are putting the net annual distribution in your other account that is probably at the bank or a money market fund, neither ofwhicharepaying much interest at all. For this reason I would recommend changing from the annual distribution with tax withholding to monthly distributions with tax withholding, or at least to quarterly distributions or keeping the annual distribution BUT WITHOUT TAX WITHHOLDING and begin making quarterly estimated tax payments that are closer to what your ACTUAL FINAL TAX BILL will be when you file your taxes. Remember, there are guidelines to follow which exempt you from paying the “under-withholding penalty” if you have to write a check to the US TREASUREY when you file your taxes.
By the way, given the mess we have with Congress NOT acting as of this date to do SOMETHING about the coming TAX INCREASE in January, 2011, the IRS has told employers and custodians to begin withholding “more” (undefined) beginning in January.If you were paying estimated taxes you would have until April 15, 2011, to allow “THE NEW CONGRESS”time to address this situation and you would not have to make the “INTEREST-FREE LOAN” to the Government that will occur with your current distribution / withholding plan.
Just my thoughts.
Jim2010-10-12 15:40, By: Jim, IP: [220.127.116.11]
L5: taxesThe FIRST CALENDAR YEAR that you take distributions from an IRA, SEPP72-T, or do a ROTH IRA CONVERSION, you are under no obligation to have taxes withheld, nor to make estimated tax payments on those amounts, so long as your total already paid in or withheld is at least equal to 100% of your prior year’s tax liability. OR so long as your total withholdings and estimated payments at least equals 90% of your current year’s tax liability ( unless you are in the upperadjusted gross incomeincome over $ 150,000 married areas that require 110% of the prior year’s tax liability to be paid in )( which is a stupid requirement).2010-10-12 17:44, By: dlzallestaxes, IP: [18.104.22.168]
L6: taxesWith regard to lost opportunity, I look at it this way. If the poster was having $10,000 withheld in Fed Taxes in the annual January disbursement, or could hold that as part of the gross payoutand invest it for 12 months in a CD making 0.75% interest, she could make $75 on that “investment” and owe taxes on that which makes it worth about $50-$60 net in the current state of the economy and interest rates. For that reason, I think it is not worth worrying about holding on themoney vs. just making the payment. To JIM’s point about considering monthly withdrawals, that includemonthly tax payments, I can see that as a good alternative, (it is how I do it with two 72t plans) in hopes that the tax money left in your IRA during the year mightgrow at more than CD rates while it is being taken out one month’s worth at a time. KEN2010-10-12 19:58, By: Ken, IP: [22.214.171.124]
I LIKE KEEPING MY MONEY AS LONG AS I CAN BEFORE BEING FORCED TO GIVE IT TO UNCLE!!!
Jim2010-10-12 20:25, By: Jim, IP: [126.96.36.199]
L8: taxesI have been reading all the posts on this, and if I get a few bucks interest in my pocket by doing monthly distributions , I would rather do one distribution yearly to decrease the chance of any errors. I wouldgladly give up that interestto reduce risk of the nightmare of a problem appearing from one of the monthly distributions. Interest rates being so low these days. Even if I did quarterly tax payments, thats a pain, and again, the few dollars I would save by doing that is not worth it to me. Guess I’m not a purist, and we all hate giving the IRS money upfront. It’s just a risk vs reward thing for me. Just my opinion, and I respect every one of you. Thanks for the different views, it makes one think! 2010-10-15 03:10, By: TheresaM, IP: [188.8.131.52]