Subject: Re: Taxes and Retirement, oops

I figured I blew it on taxes in my first year of retirement and I did. Had some penalties on both the state and federal.

A couple of things got me (besides being careless):
1. Tons of interest - From a lot of cash waiting to buy a house and earning closer to 5% instead of 1%.
2. RMDs on inherited accounts - I thought I had enough withheld but I guess not
3. Roth Conversion - again I thought I had enough but apparently not
4. Pension - Initially I thought taxes were being withheld on both state and fed level but only the fed was. I eventually caught it.

richinmd

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You can avoid exposure to the penalty problem without accurately estimating your income.

I have been doing aggressive Roth conversions for many years trying to draw down my TIRA balance before RMD's entered the picture. I calculated a conversion amount that would take my AGI up to the limit of the 24% bracket. This process necessarily involved estimating my income for the year and then calculating the proposed conversion amount to fit within the 24% limit.

If I was wrong, and my AGI exceeded the 24% limit, my only penalty was paying a marginal rate more than 24% for part of the income. The tax must be paid so the tax is not really a penalty, but I avoid any potential under payment penalty by using the 110% safe harbor rule.

For example, rather than basing my 2024 withholding and estimated payments on my estimated 2024 income. I instead base it on a known figure, my 2023 Tax Amount.

I just finished my 2023 taxes, and as part of that exercise, I compute 110% of my 2023 Tax Amount and set my 2024 estimated payments on that. So no matter what happens with my 2024 income, I am assured there won't be any under withholding penalties.

True, I may give uncle sugar a little more than I had to throughout the year, but it all settles up at tax time and the peace of mind is worth it.