Taxes in Year 1 of Retirement
I’m retiring from my W2 job in Q2 2027 and am reading up on estimated taxes to prepare.
Am I correct that because I’ll have W-4 withholding in 2027 up until my retirement date, I’m exempt from needing to hit any of the usual quarterly estimated tax payment targets (25% of the year’s required payment by April 15, 50% by June 15, 75% by Sept 15, and 100% by Jan 15 of the following year)?
I plan to do Roth conversions each year in retirement but wait until Q4 to do them so that I can adjust the size, maybe filling up a tax bracket or keeping my overall effective tax rate under some limit. I believe as long as I pay my full 2027 tax obligation by January 15, 2028 I’ll be within the safe harbor even if I don’t hit the usual quarterly targets in 2027.
Would I need to file form 2210 schedule AI (Annualized Income Installment Method) for 2027?
Years beyond 2027 seem more straightforward. My income will be more consistent year to year and I can pay quarterly using 100% (110% depending on AGI) of the prior year’s tax obligation as my safe harbor payment amount.
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I’m going through that this year, so I’ll let you know.
I don’t have an answer for this but nice strategy on the Roth conversions… I looked this up and I think it is something I will do throughout my 50s
Get yourself a copy of 
Cody Garrett, CFP® and Sean Mullaney's great book, Tax Planning To and Through Early Retirement. They conclude that Roth conversions are not needed for most people's scenarios. If I had planned better or found the FI movement a decade earlier, I would have directed more savings to my taxable account and not over-saved in my pre-tax 401k. You're still in accumulation if I remember your posts so you have time to avoid the need altogether.
They conclude that maxing pretax 401k while in the 22% or 24% brackets is unnecessary even if you only plan on using roth conversions to fill up part of the 12% bracket (MFJ, planning 70k conversions)? Or maybe I am misunderstanding, or I am not in the "most people" scenario haha
Thanks for the suggestion! Will check it out.
I'm all pretax 401k plus 457b plus HSA… so I'm going pre tax to the extreme.
I think I should Lean FIRE in 2-3 years by the time I turn 50.
My parents live off of their pension and social security and have a portfolio of about 700k that they have to take RMDs on. I've told them they can spend all of their money if they want but they plan on giving it to me and my sister.
I've thought when I turn 50 I can live off of parental gifts, then take all of that 401k money and do the Roth conversion at the 0% bracket up to like 16k year after year and live off of parental gifts which isn't income. I could do the 16k-28k bracket at 10% to move quicker or move some 457b money into a taxable brokerage.
I think with this I would be "harvesting" and really legally minimize taxes since my income would be so low.
I think I'm going to talk to a fiduciary/tax professional and give me a game plan for the next 15 years.
Any general thoughts? You seem very knowledgable about FI in general.
One thing to think about is your parents' retirement spending smile . In our older years spending decreases as activity level slows down, then spending increases again late in life due to increased medical needs. Although your parents don't need their RMD for their current spending, they should consider whether they might save the distributions for later years' spending. Their RMDs are going to be pretty modest. A 75yo in 2026 with $700K in an IRA has only a $28K RMD.
I retired a few years ago. I worked until April, then ejected after bonuses were paid.
Withholding is always considered timely, so I adjusted withholding from my paycheck to cover other forecast income for the rest of the year.
Going forward, I have been doing a Roth conversion in late December with State & Federal withholding to cover my tax obligations. I then do a "60 day rollover" transaction to replace the withheld funds to make the Roth "whole".
I had assumed that I would start doing quarterly payments, but just doing withholding from a Roth conversion is so easy and convenient that I don't see any reason to switch to quarterly payments.
The only mild inconvenience is that my brokerage does not allow me to do it online, I have to call and walk the CSR though it. The first time, they were confused at the withholding higher than they expected, then super confused by the "60 day rollover" and had to put me on while they consulted with higher level support.
They must have written a FAQ for the CSRs because the second year I did it, the CSR was a little hesitant, but I said "I did this last year, can you review my call from last year?" I heard typing for a min or two and then she explained back to me exactly what I was asking for and why. I confirmed and the entire call took no more than 10 mins.
That's a clever strategy with the Roth conversion + pseudo-60-day rollover. In Corey and Sean's tax book I remember them mentioning that withholding from an IRA distribution is applied evenly across the whole year. This could stand in for quarterly payments. Interesting.
So here's what I learned doing a deep dive on this on a day off from work yesterday.
No, having paid some tax via withholding doesn't exempt me from needing to hit the quarterly payment percentage targets. My misunderstanding sprang from a misunderstanding of how the IRS by default views the timing of income.
By default, the IRS views income as being evenly distributed across the whole year. If I have income of $10K in Q1 and income of $140K in Q4, the IRS sees that $150K income for the year and they want, in each quarter, a payment of 25% of the required payment** on the $150K.
**The required payment being enough to reach the safe harbor which is the smaller of 90% of the current year's tax obligation or 100% (110% depending on AGI) of the prior year's tax obligation.
If you were to pay in Q1 100% of the tax on only the $10K income received in that quarter, you'll have an underpayment penalty for the year because the Q1 payment is less than 25% of the required payment on $150K income for the year.
Withholding makes avoiding an underpayment penalty easier as withholding from a paycheck or from an IRA distribution are by default distributed evenly across all quarters.
I keep mentioning by default. You can use form 2210 to apply withholding to the quarter in which it was withheld (Box D) and to instruct the IRS not to evenly distribute income across the whole year (schedule AI). These options can help to avoid or reduce an underpayment penalty.
While this doesn't apply to me, I would be interested to know. I went back and looked at my tax transcripts for the year before, of, and after my last year of W-2 employment, and the only transaction that I see related to the W-2 withholding always applies to the account on the tax filing deadline. Which is strange, since I think the employer remits the withheld amount to the IRS for each pay period (though I am not certain about that).