Apparently if you withdraw from a traditional IRA (even before age 59.5) and put the money back in (even to the same account) within 60 days the IRS considers that a rollover and will not charge any taxes penalties. Also apparently the IRS considers any distribution coming out of the IRA to have occurred evenly throughout the year regardless of when you take the money out. I noticed with my IRA I can set the tax withholdings for any distribution to be 100%.

With all that said, could I simply not pay my quarterly taxes and/or not withhold anything in my paycheck all year then on the last day of the year take an IRA distribution equal to my entire tax liability but withhold 100% of it so it all goes to the IRS and then repay that amount back into my IRA from my other accounts to avoid the penalty for early withdraw?

I am not really thinking about doing this, it is more a thought exercise to figure out is it even allowed.

I'm missing something. What's the advantage of doing that if you're having to take the funds out of your regular accounts to repay your IRA w/in 60 days anyway?

nactownag said:

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You don't have to make quarterly payments and can keep your cash making money throughout the year

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I still don't understand. How does paying out of your IRA save you from having to make quarterly payments?

Jabin said:

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nactownag said:

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You don't have to make quarterly payments and can keep your cash making money throughout the year

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I still don't understand. How does paying out of your IRA save you from having to make quarterly payments?

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You still make the payments but just all at once at the end of the year so you aren't floating the IRS an interest free loan for as long as if you had had paid in April, July, October...

nactownag said:

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Yes. It's a great strategy.

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Thanks for the confirmation, I might actually look into it for next year.

nactownag said:

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Because the IRS sees that withholding on the 1099R and they consider that to be paid evenly throughout the year. The same way they see taxes withheld on a W2 for example.

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Oh, I think I see now. You set your withholdings on the IRA withdrawal to be the same amount as your tax liabilities for the year?

But you report 1099 withholdings on Line 25b of Form 1040 and Estimated Payments on Line 26. So you'd put nothing on Line 26, thus informing the IRS that you hadn't made any estimated payments and possibly incurring a penalty?

A CPA ought to chime in here to let us all know for sure if this would work.

The way I understand it is as long as you withheld enough there is no penalty b/c the IRS view the taxes coming from your IRA account to be taken evenly throughout the entire year.

So if you withheld $12k at the end of the year the IRS would view that is you paid $1k a month for the entire year not $12k on December 29th.

permabull said:

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The way I understand it is as long as you withheld enough there is no penalty b/c the IRS view the taxes coming from your IRA account to be taken evenly throughout the entire year.

So if you withheld $12k at the end of the year the IRS would view that is you paid $1k a month for the entire year not $12k on December 29th.

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Are you sure?

no... that is why I asked. But a CFP has already said yes it does.

permabull said:

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no... that is why I asked. But a CFP has already said yes it does.

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Thanks. I didn't know that he was a CFP.

Let's consider this scenario to see if I understand it.

- Individual earns $120,000 per year.
- Assume 20% tax bracket.
- Gross Pay = $10,000 per month less 20% tax = $8,000 net pay and $2,000 to the IRS.
- Individual could, instead, receive $10,000 net pay each month, save the $2,000 in a personal savings/investment account, and then write the IRS a $24,000 check on 12/31/20XX.
- IRS considers the $24,000 one-time payment as received "evenly" throughout 20XX?

- Assuming 5% interest on savings account, compounded monthly, that would be interest of $660 (PV $2,000 monthly annuity due at 5%).

Interesting...

Edit: $660 interest less 20% taxes would be $528 net.

I think for me this might be more of a safety valve at the end of the year if I didn't withhold enough throughout the year.

I get more value paying my quarterly taxes with a credit cards (sign up for a new card every quarter and use the tax payment to instantly hit the minimum spend for the sign up bonus) than I would from floating the funds and earning interest.

There is a one time per year rule on the 60 day rollovers. You can do unlimited trustee to trustee rollovers but you can only physically take possession of the money and replace it in 60 days once per year. The per year rule is a full year between withdrawal rule and not just once in each tax year rule.

Jabin said:

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permabull said:

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The way I understand it is as long as you withheld enough there is no penalty b/c the IRS view the taxes coming from your IRA account to be taken evenly throughout the entire year.

So if you withheld $12k at the end of the year the IRS would view that is you paid $1k a month for the entire year not $12k on December 29th.

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Are you sure?

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He or she is correct, and it isn't just IRA's it is any income tax withholding. I owned my own businesses most of my career, one of which was my CPA firm. I would typically underpay myself until year end. Then I would take a bonus, deduct social security and Medicare, then make the income tax withholding net the check down to next to nothing. For example, a $30,000 bonus would result in social security deducted of $1,860, Medicare tax deducted of $435 and then income tax withheld of $27,605 for a net paycheck of $100.

For purposes of the estimated tax penalty, the IRS assumes the $27,605 occurred evenly throughout the year, even though it obviously did not.

Wish i had read this a couple weeks ago, think i am going to end up short enough this year that i will have to start paying quarterly