Underpayment penalty vs. early withdrawal penalty


D

Dave Rudisill

Since nobody responded when I asked this question three
weeks ago, I'll try again:

We retired early and are living off our IRAs. Since we are
not yet 59.5 years old, every nickel we withdraw is subject
to ordinary income tax plus a 10% penalty. (A 72(t) plan did
not work for us.)

As of August 25 this year, I will be 59.5 years old.

As of the fourth quarter of 2005, the underpayment penalty
rate was 7%. Wouldn't it make sense for me to simply NOT
make estimated tax payments until after I turn 59.5?
Wouldn't the underpayment penalty be substantially less than
the 10% early withdrawal penalty?

Thanks.
 
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P

Phil Marti

Dave Rudisill said:
We retired early and are living off our IRAs. Since we are
not yet 59.5 years old, every nickel we withdraw is subject
to ordinary income tax plus a 10% penalty. (A 72(t) plan did
not work for us.)

As of August 25 this year, I will be 59.5 years old.

As of the fourth quarter of 2005, the underpayment penalty
rate was 7%. Wouldn't it make sense for me to simply NOT
make estimated tax payments until after I turn 59.5?
Wouldn't the underpayment penalty be substantially less than
the 10% early withdrawal penalty?
You must have asked this differently, or I hadn't had enough
to drink. Your plan makes good sense. Assuming you bring
things up-to-date with the September installment, the ES
penalty will be substantially less than the early withdrawal
penalty. You can see how it's calculated on Form 2210 (the
rates may be different in 2006, but the method will be the
same).
 
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H

hlunsford

Phil said:
You must have asked this differently, or I hadn't had enough
to drink. Your plan makes good sense. Assuming you bring
(...snipked.......)

Careful Phil, or you'll give readers the impression that we
only answer questions when we get home after a hard day's
work at the tax factory and are at happy hour.

Come to think of it.........!

ChEAr$,
Harlan
 
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D

Dave Rudisill

You must have asked this differently, or I hadn't had enough
to drink. Your plan makes good sense. Assuming you bring
things up-to-date with the September installment, the ES
penalty will be substantially less than the early withdrawal
penalty. You can see how it's calculated on Form 2210 (the
rates may be different in 2006, but the method will be the
same).

Thanks!
 
Last edited by a moderator:

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