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Navigating Tax Withholding - A Guide for Retirees
Episode 25525th March 2024 • Secure Your Retirement • Secure Your Retirement
00:00:00 00:19:44

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In this Episode of the Secure Your Retirement Podcast, Radon, Murs, and Taylor discuss navigating tax withholding for retirees. When you retire, you have various sources of income, and you can choose to either withhold the tax on them, make estimated tax payments throughout the year, or do a combination of both.

Listen in to learn about your tax withholding options regarding your social security benefits, pension income, and IRA distributions. You will also learn about sources of income not eligible for tax withholding, plus how to avoid tax penalties after selling a highly appreciated asset.

In this episode, find out:

●     Understanding tax withholding and how it differs from estimated tax payments throughout the year. 

●     The options you have when it comes to tax withholding on your social security benefits.

●     The process available and information needed for tax withholding on your pension income.

●     Understanding the default and other tax withholding options available to IRA distributions.

●     Sources of income not eligible for tax withholding and the tax options available for them.

●     Pay attention to the next estimated tax due date when you sell a highly appreciated asset to avoid penalties.

●     All the information we need to know to advise you accordingly and avoid any tax surprises during tax season.

Tweetable Quotes:

●     "Paying estimated taxes periodically demands foresight and a significant time commitment. Your CPA can assist you in projecting the quarterly payments necessary."- Taylor Wolverton

●     "Upon retiring, there may be several years of transition as you establish diverse income streams, with social security being merely one aspect of this process."- Taylor Wolverton


If you are in or nearing retirement and you want to gain clarity on what questions you should be asking, learn what the biggest retirement myths are, and identify what you can do to achieve peace of mind for your retirement, get started today by requesting our complimentary video course, Four Steps to Secure Your Retirement!

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Radon Stancil:

Welcome to Secure Your Retirement Podcast. Today is another special edition, with a guest that we've had on before, Taylor Wolverton. We're going to talk about taxes.

Before we get into that topic, thank you, Taylor, for coming on and chatting with us.

Taylor Wolverton:

Yeah, you're welcome.

Radon Stancil:

Here's the theme of what we're going to be talking about, is navigating this idea of tax withholding, especially in retirement. The reason why this is a big deal is, we see it all the time, its people are taking money sometimes from different places than they were taking while they were working. Everybody understood, gets the concept that if I'm a W2 employee, I have my withholding come out of my paycheck. It's almost an automatic, when I get a job, I'm going to fill out the forms I need to, to identify how many dependents I have and all those kind of things. It's usually pretty good.

But then as we get into retirement, we start to get a pension sometimes, we get social security sometimes. We have sometimes taking money just out of cash that used that year that's not even taxable to us. We really have to think through. One of the things that we do with our clients is we do an annual tax strategy meeting. A number of times last year, Taylor was able to identify that, "Hey, you need to adjust your withholding." That could be up or down. We want to just dive into this topic today.

Murs Tariq:

Yeah. I think, Taylor, the best way to get started here, because again, most people work their careers not really worrying too much about where the taxes are getting paid from, they're just used to it coming right out of their paycheck. I can't tell you the amount of times that I've been in a meeting and asked someone, "Have you ever made a quarterly estimated payment before?" And they have no idea as to even what that is.

I think it would be good to start with just a distinction on what is withholding versus what is an estimated tax payment.

Taylor Wolverton:

Yeah. To pay your taxes, you, to put it simply, have two options. Or you can do a combination of both.

But one of those options is to withhold taxes from your income as you receive that income. Like Radon was saying, when you're a W2 employee, your employer withholds Federal and state taxes from your wages for you. Once you transition to retirement, you have more variety in the sources of income that you have a lot of times, so now you can choose to withhold taxes from your social security, from your pension, from your account distributions, all of those different sources that you have available to you, whatever applies in your situation. That's, in my opinion, the more simple way to go about it. It requires less effort on your part once it is set up correctly.

The other option is to make estimated tax payments throughout the year. What that requires is a little more forward-looking, a lot of times your CPA can help you estimate you need to pay each quarter. They'll even sometimes give you vouchers with the due date for when you need to make those payments and the dollar amount. But you can go online to, and then each state also has a website where you can make payments. The due dates for those payments are not what you might think. They're not exactly even quarters. April 15th is the first due date for income you received from January 1st through the end of March. The next due date's June 15th, September 15th, and then the last quarter is due January 15th. Whatever tax you owe in each of those quarters needs to be paid online or through whatever method you prefer by those due dates.

Radon Stancil:

Excellent. Well, that's nice to get that. Now we talked about the different types of income that we could get in retirement. Can we tackle just the first one now, is social security?

Taylor Wolverton:


Radon Stancil:

What do we need to think about on that type of income?

Taylor Wolverton:

Yeah. A lot of times, when you first retire, you might not also be starting social security immediately. This is something that we're reviewing with our clients each year, looking at when those new sources of income get turned on. Or maybe it starts for one spouse, but not the other for a few years. There can be quite a few years of transition, once you do actually retire, through starting these various sources of income.

Social security's a common one, most people have social security benefits. The default withholding on social security is actually 0%. If you don't fill out the form or make an election to have Federal taxes withheld from your social security, you are not having any taxes withheld. We do also have an episode that we've done previously on how social security benefits are taxed, so you can listen to that episode if that's something that would be interesting to you. Most social security benefits, depending on your situation, will have Federal taxes due, but it depends on the state that you live in whether you'll have state taxes due. North Carolina's a state that you do not have to pay state taxes on your social security benefits for.

But two, if you do want to start withholding Federal tax from your social security, you can go online. You can Google Form W4V, that's the form that you will need to fill out in order to start withholding Federal tax from your social security benefits. That form, fortunately, is pretty straightforward. There are boxes you can just check next to which box you want for starting withholding on 7%, 10%, 12%, or 22% of your benefits each month. That will just be automated from that point on for each benefit that you receive going forward. If you want to stop withholdings on your social security, you'll use that same form and just check the box to say, "I want you to stop withholding taxes." That one's pretty easy to start if you want to do that.

Murs Tariq:

Yeah, I'm glad you brought up that episode, Taylor, because so many people, again, will think, "I've paid into social security for so long, how could I possibly be taxed on it?"

Taylor Wolverton:


Murs Tariq:

Well, there are things to understand about social security and if you ignore it, then you could get a surprise come tax filing season. There's limitations on income and it brings you into taxability for social security, we did a great episode on it. For anyone listening, it's episode 231. It'll be in the show notes as well. Thanks for that, Taylor, on social security.

How does pensions work? Pensions are typically coming from a government or a company. Do they treat things differently?

Taylor Wolverton:

Yeah. Not everyone will have a pension available to them. But for those people that do have a pension, if you want to withhold taxes from your pension, that requires form W2P. A lot of times, that's in the paperwork that you get from whatever source your pension is coming from when you do start the pension.

It's not as straightforward, unfortunately, as the social security withholding form. A lot of times, it's just a guide to approximate withholding on your pension. You can use tools from the IRS to help you fill out that form, which I would recommend doing. It's called the IRS Tax Withholding Estimator, you can find it online by googling that. That'll help you know how to fill out that form because it does require a little more information than just checking a box next to the amount that you want withheld. That form can also be used to stop withholding on your pension, if that's what you want to do at any point.

Radon Stancil:

Excellent. All right, now the next one here is IRAs. With IRAs, this one to me, for decades people save into their 401K, they don't touch that money. Then all of a sudden, they get down to this retirement time and they either need it for income, and there is a point when they are required to take a certain amount of money out of their IRAs. Can you walk us through IRA distributions?

Taylor Wolverton:

Yeah. This is something that we review a lot, especially like Radon said, for clients that have turned 73 this year or their spouse has, and they're starting their required minimum distributions for the first time. That's going to cost more in taxes, so it's something that we have to navigate how much needs to be withheld, or how much do they need to make in estimated tax payments to consider the taxes that will be due on their required minimum distributions for the first time.

If you're starting distributions from an annuity for example, and it's a periodic distribution that you're going to be receiving monthly, a lot of times the default withholding on those will be 10% in Federal taxes withheld from each distribution. If you want to make changes to that default 10% withholding, you can fill out the Form W4R, and then you can choose to withhold more than 10% or choose to not withhold any taxes at all.

From those distributions that are coming just from an IRA at a custodian that you're taking RMDs from, whether it's for the first time or not, then a lot of times for our clients, we can help set up the withholding, both Federal and state withholdings, on their distributions once those begin for them. If you're working with a financial planner, they can help you set those up along with your distributions.

Murs Tariq:

All right. We've talked about some of the most common forms of income, especially in retirement, which is social security, maybe a pension, and then your IRA, your pre-tax assets like an IRA or maybe that 401K that you built up that you rolled into an IRA. But we've talked solely about withholdings thus far.

But we know, because we sit in these meetings, and sometimes there are surprises coming a client's way when it comes to taxes. We want to try to avoid that as best as possible, but there are things that are not eligible for withholding. Can you walk us through those and how we treat the tax on those?

Taylor Wolverton:

Yeah. Some sources of income that are not eligible for withholding typically are interest that you receive, maybe it's from a CD or a savings account, or a brokerage account that you have money market savings in, something like that, dividends, capital gains, royalties. If you sell a property, sometimes you might owe Federal tax and state tax on the proceeds from the sale of your property. Rental income will not have a default withholding. Self-employment income also does not. Then if you have alimony, if that's part of your financial plan.

Those sources of income, if those are involved in your plan, those might be the situation where you consider a combination of withholdings and making estimated tax payments. Or if it's even a one-time thing, if you sell your home this year, and you walk through the situation and you know you're going to owe tax on that sale, you might make an estimated tax payment just to go with that one-time income source. Or if you sell a stock that's been highly appreciated, again that might be a one-time thing, it's only going to be this year, it's not something that's recurring every single month, then you might make an estimated tax payment in the same month that you sold that stock, just for the Federal tax that you might owe on that sale alone.

Some things to be considering. Self-employment income, same thing. You're your own employer and employee, so you don't have an employer automatically withholding Federal and state tax on that source of income for you. That's another time when you're going to want to make estimated tax payments for your self-employment income.

Radon Stancil:

Excellent. Can we talk about something on that particular topic? Let's say somebody does sell something highly appreciated, I want to make sure it's clear. Let's say all of a sudden, I know I've got 100,000, or something, a larger sum of money that's going to be on my tax return, how fast should I go and make that deposit over into taxes, or can I just wait until April 15th?

Taylor Wolverton:

It depends on what time of year you sell the stock. That's when you'll want to look at the due dates for those quarterly estimated tax payments. If you're selling your stock before the end of March, that estimated tax payment is due April 15th. If you're selling between April and June, the estimated tax payment is due June 15th. The next one, September 15th, and then January 15th for anything in the last three months or so of the year. It depends on what time of year your income event occurs, you'll want to line that up with the next due date for the estimated tax payment to avoid any penalty on that amount.

If you wait until your tax return is filed, you wait until April 15th of the following year to file your tax return for that year when that income is reported, then that's when you might be subject to a penalty. That's what we want to avoid, is unnecessarily paying penalties, so that's something we can plan ahead for.

Murs Tariq:

Yeah. Another CPA has told me once that if you know you're going to have a capital gain, or you have an unexpected liquidation event, or something like that, the IRS typically wants their tax revenue on that transaction. If it's not withholdable, then like Taylor said, you need to think about paying it earlier rather than waiting until April 15th, to avoid any types of penalties and interest on that tax money.

Taylor Wolverton:

Yeah, exactly.

Murs Tariq:

If you're listening, you're probably thinking, "Well, I need to start looking at this stuff. I haven't been withholding on my social security." Or, "I did just sell a large piece of stock and I need to start doing some quarterlies," and things like that. Taylor, can you walk us through? We do tax strategy meetings for our clients, to stay on top of this so there are no surprises come April 15th. Can you walk us through a little bit of the process and what your conversations look like with clients to review their taxation as well as their withholdings, and make sure they're on pace for a good tax season?

Taylor Wolverton:

Yeah, yeah. This is one of my favorite conversations to have with people. Probably other people don't think it's as fun as I do, but I think it's really fun to look at all your sources of income, all of your withholdings, figure out if you're on track.

It's pretty much everything that we've talked about in this episode already, we'll need to know about your situation in order to determine if you're on track or if you need to make any adjustments to your withholdings. We'll need to know how much you're receiving in social security, how much you're receiving from your pension, what your withholdings are, if any, on those sources of income, any other source of income that you have. If you sold a property, I'll be asking for information about how much you sold it for, how much you bought it for. Same for a sale of a stock or any other securities. It really just depends on the situation.

If you're still working or if you were working for part of the year, then I'll want to see your pay stubs. That will show how much income you've received in wages from your employer, and how much has already been withheld on those wages. Then we can look at going forward, how much more you expect.

Yeah, really just I'll need to know information all of your sources of income and withholdings associated with those sources of income. Then we can line up, talk about whatever your preference is for if you want to receive a refund when you file your tax return, or if you prefer to make a payment, if you prefer to withhold, if you prefer to make estimated tax payments. We'll talk about what you want so that it aligns with your goals for your tax strategy.

Radon Stancil:

Excellent. Well, thank you very much, Taylor. What we want to say is, is that if anybody's listening to this and you're thinking, "Man, I got a question on a particular part of this," you can just go to the website, top right-hand corner, click on Schedule Call. That'll bring the calendar for Murs and myself, and then we can have a quick little conversation, and then we can get you on the line with Taylor. If you have any questions, feel free to reach out to us and we are glad to help you.

Also, all of this that we just talked through, a blog has been written on this. You can just go to the blog page, which is, go to the blog page, and it's all there.

Thank you very much, Taylor. We appreciate it.

Taylor Wolverton:

Yeah, thank you.



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