Q: This year my tax preparer gave me “tax vouchers” and said I need to send in a bunch of tax payments this year. Admittedly, I’m bad at keeping track of stuff like this. Is there another way to avoid making these quarterly estimated tax payments?
A: Yes, depending on your particular situation, there are multiple ways to avoid having to make quarterly estimated tax payments.
To avoid penalties and interest, you need to either (1) send in enough to cover most of this year’s tax owed or (2) just pay at least what you owed last year.
But, if you happen to have sources of income where taxes are already being withheld on your behalf, you can adjust your tax withholding to avoid penalties, too.
If you’re still working, you can certainly increase your tax withholding. If you are retired and get a pension or Social Security, consider tweaking your tax withholding from these sources. And, if you are taking out money from your IRA, ask your advisor or brokerage firm to withhold enough to avoid underpayment penalties..
With just a little tax planning, you can absolutely avoid the mundane (and painful) task of writing eight tax checks with those seemingly random deadlines!
Q: We recently sold our business and have a lot of cash sitting around. With things looking so uncertain right now, we’re wondering about the best path forward. Does it make sense to let it just sit there or should we invest the money?
A: Before investing any of it, you really should sit down with your advisor to develop a detailed retirement-income model. This work will set the stage for your longer-term investing. It will also give you a chance for thoughtful planning. Investing the cash really is a secondary decision that comes after a well-developed plan.
Keep in mind, there may be some smart tax strategies to follow in the early years of your retirement. For example, doing strategic Roth conversions or voluntarily taking some capital gains are worthy of analysis. Having the cash to help manipulate your tax picture is a key ingredient for these strategies.
Addressing today’s market uncertainties, I think the old-fashioned approach of using “dollar-cost averaging” is always wise. This is just a fancy way of saying that you should spread your investments into the market over a set time period. This technique avoids plunking it all down at exactly the wrong moment. Eliminating regret or even long-lasting emotional scars about investing, especially right off the bat, will help you stick to your plan.
Jason P. Tank, CFA, CFP® is both the owner of Front Street Wealth Management, a purely fee-only advisory firm and the founder of the Money Series, a non-profit program committed to providing open-access to financial education, for all. Contact him at (231) 947-3775, by email at [email protected] and at www.FrontStreet.com
