Calculate what to pay for estimated taxes
Similar to withholding, if you are paying estimated taxes you should evaluate whether you need to increase the amount you are submitting each quarter. Maybe you are self-employed and expect to earn more this year. If you are newly retired, you are no longer having taxes withheld from a paycheck and need to make estimated payments on other sources of income such as retirement funds and Social Security. Or if you have been retired but plan to withdraw more money from your investments in 2022, you may need to increase your estimated taxes.
If you have a large capital gain late in the year and have not planned for it, your estimated payments may fall short. For example, suppose you received primarily Social Security benefits the first three quarters of the year and then took a large IRA distribution in the fourth quarter. In that scenario, you can minimize, if not eliminate, any underpayment penalty by making a catch-up estimated payment in the fourth quarter, Becourtney says. But the taxpayer must file IRS Form 2210, “Underpayment of Estimated Tax by Individuals, Estates and Trusts,” with their tax return, he adds.
“They’re not automatically penalized because they weren’t a mind reader,” Becourtney says.
Budget for retirement contributions
If you were scrambling to find $7,000 by April 18 to contribute to your IRA, now is the time to create a plan to make smaller contributions throughout the year. The same budgeting, and belt-tightening if possible to free up cash, can be used to boost your 401(k) contributions.
“Make those monthly contributions, make them weekly if that’s what fits your budget and works for you,” Schultz says. “You’ve gotten your tax benefit from it because you got your deduction, and now you’ve also funded your retirement.”
You can also benefit from dollar-cost averaging (DCA) as you make smaller investments throughout the year instead of one $7,000 purchase on one date, an advantage that could be especially helpful during a volatile market.