Author Topic: When living off investment returns, do you pay estimated quarterly taxes?  (Read 1397 times)

RedmondStash

  • Pencil Stache
  • ****
  • Posts: 666
I'm used to employers paying estimated federal taxes, or to tracking consultant/self-employment income and paying estimated quarterly taxes.

But when you're retired, and you're living off investment income, do you have to pay estimated quarterly taxes, like when you're self-employed? Or do you just pay taxes annually, on April 15? Does it depend on how much income and what type (IRA withdrawals vs. long-term capital gains)?

Thanks.

terran

  • Pencil Stache
  • ****
  • Posts: 912
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #1 on: December 21, 2017, 08:57:17 PM »
It doesn't matter where your income comes from, if you don't pay taxes during the year and you owe at least $1000 you will pay underpayment penalties. Since you'll likely be able to project your income with a high degree of accuracy you can just pay 100% of what you paid the previous year (110% if you're over certain income limits) or 90% of what you will owe in the current year in 4 equal installments and you should be fine.

StetsTerhune

  • Bristles
  • ***
  • Posts: 415
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #2 on: December 22, 2017, 01:37:28 AM »
This year, my first full calendar year without any wage income, I decided to just do quarterly payments to match what I paid last year. Partly out of uncertainty (that I'd really have no income), partly because you can pay with credit cards and make a little money (I've used 3 out of 4 to hit a cc bonus minimum spend)

Despite harvesting about 80k in capital gains this week, I should owe zero taxes for 2017 and I'll get all those payments refunded. Next year I won't do any estimated payments, since I'll know I can't face any penalties no matter what (since I paid nothing for 2017).

Where the income comes from matters, but only to the extent that it affects how much tax you'll owe. long term capital gains are zero % for a long time, so hopefully you won't end up paying many taxes in retirement.

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2588
  • Age: 117
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #3 on: December 22, 2017, 02:49:27 AM »
The following is only as far as federal taxes go, as I live in a tax free state so I have no idea about state taxes.

Have you seen Go Curry Cracker's blog about never paying taxes again in retirement? Cause it is completely true and so far, even with the changes that may come into play, it's likely to stay that way as far as I can tell. https://gocurrycracker.com/never-pay-taxes-again/

I don't generate enough investment income to pay any taxes so I just file them like regular folk do before April 15th or whenever the 1099s show up.

I'm well below the 15% taxable bracket limit for married filing jointly, so even though all dividends, cap gains and RMDs I make are reported on my tax return as simple (but not earned) income, they are not enough to push me into the 25% taxable bracket and thus trigger any taxes owed. So zero taxes.

I'll probably explain this weird, but take a look at the brackets for 2017 here:
https://www.taxact.com/tools/tax-bracket-calculator

               
Tax rate  Single           MFJMFSHOH
10%           Up to $9,525    Up to $19,050    Up to $9,525    Up to $13,600
15%           $9,526 - $38,700    $19,051 - $77,400    $9,526 - $38,700    U$13,601 - $51,850

So based off of that, if you are single, you can generate up to $38,700 in investment cap gains/dividends... but as long as you're under that amount on your taxes, you pay zero for the federal portion because dividends and capital gains do not require taxes paid on them if you are in the 15% or below bracket.      

Now I do have a required minimum distribution (RMD) due to an inherited IRA, and that is also taxed differently. But because my income is so low, it is cancelled out by the standard deduction. There may come a point where the RMD is insanely large and I might have to pay taxes on it, but that would be a 1st world problem and I'm doing my best to use the iIRA as my main account to try to deplete it before it gets too large or runs into my own IRA distributions in a few decades.

If you're married filing jointly (MFJ) then you get a ridiculous by MMM forum standards of $77,400 to work up to. I seriously don't think I could even come up with ways to spend that amount of money, so I control the amount of income (investment selloffs/withdrawals) to make sure I stay within the amount that nicely covers the year's expenses. I withdraw about once every quarter to cover the coming quarter's expenses, but 3rd quarter I tend to skip any investment and track the amount of projected dividends/cap gains for the big year end distribution so I have some wiggle room.

NOTE: I keep our income generated low enough to hit the ACA sweet spot. If the subsidies go away, I'll no longer worry about keeping the investment income lowish/monitoring the expenses/income generated as closely, but there's no way I'd every spend up to the top of the MFJ taxable bracket.

Now if you expect to spend way more than $77K in retirement, there will be taxes, so you likely should try playing with the different scenarios since things like kids and other stuff may drop your taxable income down due to EIC and such, but I have no idea about all that. Here is the TurboTax TaxCaster that might help to see how this stuff might shake out: https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

If you're on the MMM forum, I'd like to think you'd be able to live a pretty lavish lifestyle at or below the 15% taxable bracket ranges tho.
« Last Edit: December 22, 2017, 02:56:27 AM by Frankies Girl »
I frequently have no idea what I'm talking about. Like now.

FIREd as of: March 6th, 2015!

Ting is awesome! Get $25 if you use my referral code: https://z0p1rd31m89.ting.com/

Holyoak

  • Bristles
  • ***
  • Posts: 270
  • Age: 51
  • Location: W. PA
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #4 on: December 22, 2017, 06:37:23 AM »
My situation, and reply would be very similar to Frankies Girl, other than I'm single, and have state income tax.  I remit quarterly payments for them, but not federal because it's zero.  ACA subsidies are the reason I too keep investment income low, re-balance minimally, and still kick myself about a stock sale I held out on, because of these subsidies...  I can't stress enough how much this effin ACA situation impacts FIRE, especially at my age.  Not only is the crazy cost relative to services rendered a huge issue, what I really hate is how it effects mobility. 

First thing I check before considering a relocation scenario is ACA/health insurance cost impact...  It really sucks, and I can only imagine how freeing it would be, not have to deal with such BS.  Good luck OP, and nice reply FG.

soccerluvof4

  • Magnum Stache
  • ******
  • Posts: 3193
  • Location: Artic Midwest
  • Retired at 50
    • My Journal
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #5 on: December 22, 2017, 07:04:01 AM »
For us its a little different. While I am fire'd my DW is still working. So basically her entire paycheck is going to go to tax deffer-ed accounts and were going to live on a smaller withdrawal percentage and use up a bit of our cash since we have accumulated 4-5 years as opposed to the 2-3 years which makes sense for a market downturn. So with the tax taking out of her paycheck and our withdrawals in doing this the next 2 years were looking at paying very little to no taxes. So to do quarterly wouldn't make sense for us right now so we just do the year end.
" In life you don't get what you deserve you get what you negotiate"

jim555

  • Handlebar Stache
  • *****
  • Posts: 1423
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #6 on: December 22, 2017, 07:24:56 AM »
Between QD and LTCG no taxes owed.

RedmondStash

  • Pencil Stache
  • ****
  • Posts: 666
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #7 on: December 22, 2017, 10:59:11 AM »
Thanks, everyone! Very helpful stuff here.

Frankie's Girl, I do get what you're saying about the tax brackets; I've been wrapping my head around earned income vs. investment income, how they're taxed differently but both count toward that $77k. We don't yet have RMDs, but we want to start moving our IRA money into our Roths next year. We might even move a little extra if, according to the new tax bill, it'll be taxed at 12% instead of 15%. Not a fan of the bill, but I'm a pragmatist, and since I hope that 12% rate gets increased in a future Congress, I want to take advantage of it while it applies.

Still trying to absorb the idea that we can spend that much and not pay federal taxes. The American tax system is weird. That's partly why I posted the question: I wasn't sure if there were "gotchas" that folks here had encountered that I didn't know about yet.

Thanks again.

Daisy

  • Handlebar Stache
  • *****
  • Posts: 1775
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #8 on: December 22, 2017, 11:30:13 AM »
I was wondering about this too as 2018 will be my first fully FIREd year.

My income will come from Roth conversion pipelines. I can generate whatever income I want and can decide how much tax to pay.

I was wondering if when doing the Roth conversion if the broker would automatically withdraw tax like happens with bonus checks.

jim555

  • Handlebar Stache
  • *****
  • Posts: 1423
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #9 on: December 22, 2017, 12:36:55 PM »
I was wondering about this too as 2018 will be my first fully FIREd year.

My income will come from Roth conversion pipelines. I can generate whatever income I want and can decide how much tax to pay.

I was wondering if when doing the Roth conversion if the broker would automatically withdraw tax like happens with bonus checks.
I did one and no withholding was done with a Roth conversion.

Financial.Velociraptor

  • Handlebar Stache
  • *****
  • Posts: 1055
  • Age: 45
  • Location: Houston TX
  • Devour your prey raptors!
    • Financial Velociraptor
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #10 on: December 22, 2017, 02:32:38 PM »
I pay quarterly.  My options centric approach creates a lot of short term capital gains and is not very tax efficient. 
Achieve Financial Escape Velocity - Financial Velociraptor

RedmondStash

  • Pencil Stache
  • ****
  • Posts: 666
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #11 on: December 22, 2017, 03:05:42 PM »
I was wondering about this too as 2018 will be my first fully FIREd year.

My income will come from Roth conversion pipelines. I can generate whatever income I want and can decide how much tax to pay.

I was wondering if when doing the Roth conversion if the broker would automatically withdraw tax like happens with bonus checks.

I would hope not, because that would mean some of the Roth money is going to taxes instead of into the IRA. I'd rather pay the taxes from my taxable account and get the full amount into my IRA.

Daisy

  • Handlebar Stache
  • *****
  • Posts: 1775
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #12 on: December 22, 2017, 03:12:53 PM »
I was wondering about this too as 2018 will be my first fully FIREd year.

My income will come from Roth conversion pipelines. I can generate whatever income I want and can decide how much tax to pay.

I was wondering if when doing the Roth conversion if the broker would automatically withdraw tax like happens with bonus checks.

I would hope not, because that would mean some of the Roth money is going to taxes instead of into the IRA. I'd rather pay the taxes from my taxable account and get the full amount into my IRA.

True. The broker making the conversion doesn't even know your tax rate. I guess while employed the company usually takes out 25% of any bonus money. Maybe they know your income and are required to withdraw.

I am a Roth Conversion Pipeline-still-in-training FIREe. I'm not even sure how much I am going to convert next year. It depends on how many taxes I wish to pay. I could convert just enough to never pay tax, but I think my tax deferred money would still balloon and I'll be hit with RMDs when I am older.

I am also worried that tax rates could go up in the future.

Also, I don't want to wait until age 62 or 65 when I start collecting SS and be pulling out more then, which having a higher income then could affect SS benefits.

It's such a balancing act...I'm sure I will fall flat on my face a few times before I perfect it.

RedmondStash

  • Pencil Stache
  • ****
  • Posts: 666
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #13 on: December 22, 2017, 03:46:08 PM »
I am a Roth Conversion Pipeline-still-in-training FIREe. I'm not even sure how much I am going to convert next year. It depends on how many taxes I wish to pay. I could convert just enough to never pay tax, but I think my tax deferred money would still balloon and I'll be hit with RMDs when I am older.

I am also worried that tax rates could go up in the future.

Also, I don't want to wait until age 62 or 65 when I start collecting SS and be pulling out more then, which having a higher income then could affect SS benefits.

It's such a balancing act...I'm sure I will fall flat on my face a few times before I perfect it.

Yep, I feel much the same way. Next year is one big experiment. I've already made a couple of flubs.

When I start fussing over the details, I remind myself that success comes in the long term, in broad decisions, not in the relatively small decisions I'm making right now. Whatever mistakes I make, we have many years to recover from.

Live and learn, and then onward!

SwordGuy

  • Magnum Stache
  • ******
  • Posts: 3580
  • Location: Fayetteville, NC
    • Flipping Fayetteville
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #14 on: December 22, 2017, 07:37:53 PM »
Both the 401k and the IRA we're withdrawing from hold back estimated taxes.    Can't say that's an absolute requirement, though.

RedmondStash

  • Pencil Stache
  • ****
  • Posts: 666
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #15 on: December 22, 2017, 07:52:26 PM »
Both the 401k and the IRA we're withdrawing from hold back estimated taxes.    Can't say that's an absolute requirement, though.

Interesting. Good to know. Sounds like it's worth asking about ahead of time.

Daisy

  • Handlebar Stache
  • *****
  • Posts: 1775
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #16 on: December 22, 2017, 07:55:41 PM »
Both the 401k and the IRA we're withdrawing from hold back estimated taxes.    Can't say that's an absolute requirement, though.

Interesting. Good to know. Sounds like it's worth asking about ahead of time.

I hope it works that way. I'd really only like to deal with TurboTax once a year. That's enough for me.

MoseyingAlong

  • 5 O'Clock Shadow
  • *
  • Posts: 64
Re: When living off investment returns, do you pay estimated quarterly taxes?
« Reply #17 on: December 22, 2017, 11:35:17 PM »
Both the 401k and the IRA we're withdrawing from hold back estimated taxes.    Can't say that's an absolute requirement, though.

The form you submit to the investment company with how much you want to withdraw will (should) have places for you to indicate how much income tax, federal and/or state, you want withheld.

When you read the instructions for the form, they should tell you what they withhold if you don't give directions. I recommend doing a tax projection and telling them how much to withhold, be it 0 or something more.

For my financial planning clients who had multiple streams of income, such as a pension, social security, IRA RMDs and investment income, I would recommend a certain amount of withholding from the pension and generally leave that alone, year after year, since they are often difficult and slow to adjust. Then at year end, we'd do a tax projection and adjust the withholding on the IRA RMD to avoid any penalties. Easy to do since it was a single form and we knew when it would happen.

HTH