Estimated Taxes in Retirement – Managing Tax Bills in Retirement

For most retirees, you won’t need to pay estimated income taxes. That’s one less thing to do each quarter! However, there are a few circumstances when paying estimated taxes in retirement may be necessary:

When You Need To Pay Estimated Taxes in Retirement

There are 3 common scenarios when you may be required to submit quarterly tax payments in retirement:

Capital Gains — if you have a large brokerage account and are routinely selling appreciated stocks, you may have a large tax bill due for capital gains.

Long term capital gains will be taxed between 0% and 20% depending on your income. Short term capital gains will be taxed at your income tax rate.

Dividends and Interest — similarly, if your bond funds and stock funds distribute lots of dividends or interest, you may need to pay in more for income taxes.

Qualified dividends are taxed at long term capital gains tax rates. Other dividends and interest are taxed at income tax rates.

Unlike withdrawals from your 401(k) or IRA, you can not withhold taxes automatically in a brokerage account. This means that any taxable event that occurs in a brokerage account may require that you add to your withholding in other sources of income, or send in estimated payments.

Roth Conversions— if you perform a Roth conversion this year, some amount of tax will be due. You may be able to withhold taxes directly from your IRA. However, it is normally better to pay taxes with other sources of after-tax money, if able. If you have the cash on hand or in a brokerage account to pay the tax bill for your Roth conversion, you will likely want to use that instead.

Roth conversions are taxed the same as regular IRA withdrawals, at income tax rates.


Remember that in addition to Federal estimated taxes, you may also need to make payments to your state as well. We cover reducing taxation from high tax states here.


How to Know If You Need to Pay Quarterly Taxes

We use a tax program like Holistiplan to mock up a 1040 return for our clients. Planning early for any tax liability during the year can be very beneficial. A good estimate will show how much your ordinary income and capital gains taxes are.  You’ll want to compare that to how much you are regularly withholding for taxes.

Or, look into the IRS’ withholding calculator to input your information and get an estimate on if you are building up a tax liability.

If you need to submit a payment to the IRS, you can pay directly on the IRS website using your bank account, debit card, or even credit card.


How to Avoid Needing To Pay Estimated Taxes in Retirement

To avoid the hassle of needing to submit extra payments, you may be able to adjust tax withholding on things like pensions, Social Security, annuities, or traditional IRA withdrawals.

You can also consider other tax planning strategies like tax loss harvesting to reduce your taxable gains or income.


For those looking for more in depth information on creating tax efficient retirement plans:

We recently did a webinar here on retirement withdrawal plans.

Or, schedule a free consultation with us to see how we have helped others like you reduce their retirement tax burden.



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