Retiring this summer? Plan for estimated tax payments.

June 4, 2016

Early retirement, delayed retirement, phased retirement – if you've decided this summer is your time to leave the workforce, you have decisions to make. One of them is whether you will need to pay estimated taxes. While you may expect your income to decrease when you're not working, remember that you might be withdrawing funds from your IRAs and other retirement accounts, selling investments from your brokerage accounts, and drawing social security.

All of those sources of income can be taxable on your federal income tax return. And if you fail to pay the required amount of income tax, you may owe an estimated tax penalty. In general, to avoid a penalty, you need to pay the lesser of 90% of your tax bill for 2016, or 100% of your 2015 tax liability (110% if your adjusted gross income for 2015 was greater than $150,000).

Take time now to run the calculation. Estimated tax penalties are assessed on a quarterly basis, and the second installment is due June 15. If you think you'll fall short of the required amount, consider having federal income tax withheld from your IRA withdrawals or social security benefits. As always, we're here to help you determine what course of action is best for you.

Keywords: retirement
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