Q. I am an FERS employee and, for various reasons, have selected Nov. 28, 2015, as my retirement date, age 60+ with 21 years civil service and four years military, for which a deposit has been made. One of the many reasons that I selected this date was so that I could have a Thrift Savings Plan residential loan balance declared as a taxable distribution during the 2015 tax year, because I will have substantial withholdings by that time, and given my tax return history, would have a significant tax overpayment that would be useful in paying a portion of the tax bill rather than receiving it as a refund. It was my intention to pay the remaining tax liability (however much it is) with a smaller withdrawal of TSP funds, and take that as a taxable distribution during the following tax year (2016), which could be manageable through withholdings from my pension and life annuity payments.
Subsequently, however, my research has uncovered that the Internal Revenue Service levies a substantial (but unspecified) penalty against any retiree if “90 percent of a payers’ tax liability is not withheld from salary, pension and annuity or made via quarterly payments” during the tax year.
Does this IRS rule apply to my situation? If so, regardless which date I choose in FY2015, I will surely fall short and be subject to that penalty, as I will no doubt be owing greater than 10 percent of my total tax bill, and officially be a “retiree” by the end of tax year 2015, even though I will not have even received any retirement pay from either pension or annuity by years end, due to high processing times.
How much is the penalty that the IRS assesses against retirees who have had insufficient withholdings during a tax year?
If this rule applies to me, I will have to postpone my retirement date until year’s end so that the distribution is declared in 2016, and then make quarterly tax payments to cover the total outstanding amount due, which would greatly complicate my cash flow situation during my first year of retirement, and possibly make it unfeasible.
A. Sorry, but these are questions for the CPA who will prepare your tax returns for the year(s) in question. There are some exceptions to the 90 percent rule and, in my experience, the penalty for under-withholding is not severe.