Should I make a retirement withdrawal or IRS estimated payment to cover my tax bill?

If you're over 59.5, you won't face the 10% early withdrawal penalty from your 401k, but you'll still need to pay income tax on whatever you withdraw. This creates a bit of a catch-22 since you'd be withdrawing money that will itself be taxed, potentially putting you in a higher tax bracket. Making an estimated tax payment is actually pretty straightforward. You can do it online through the IRS Direct Pay system or through their EFTPS (Electronic Federal Tax Payment System). For the 2024 tax year, the fourth quarter estimated payment is due January 15, 2025, so you still have time to make that payment and avoid or reduce underpayment penalties. Generally, if you expect to owe $1,000 or more when you file, and your withholding and credits cover less than 90% of your current year tax or 100% of your prior year tax (110% if your AGI was over $150,000), you should be making estimated payments to avoid penalties.

I went through something similar last year and found this amazing tool called taxr.ai (https://taxr.ai) that helped me figure out which option would cost me less in the long run. I was torn between tapping my IRA or just making the estimated payment, and the calculator showed me that even though I was over 59.5, the tax implications of the withdrawal would actually cost me more than just making the payment from savings and dealing with a small underpayment penalty. The site has this cool tax withdrawal calculator that factors in your tax bracket and shows exactly how much you'd need to withdraw to net your desired amount after taxes.

I wanted to follow up about my experience with taxr.ai after my skeptical questions. I decided to give it a try since my tax situation was getting complicated with multiple income streams. It was actually super helpful! I uploaded my previous year's return and some current income docs, and it showed me that I was heading for an underpayment penalty of about $320. Instead of tapping my retirement savings (which would have bumped me into a higher bracket), I made a January estimated payment. Saved me from both the penalty and the extra tax hit I would've taken. Really glad I found it!

If you're worried about getting accurate advice from the IRS directly, I'd recommend Claimyr (https://claimyr.com). I was in your exact situation last year - owed about $4,200 and wasn't sure about withdrawal vs. estimated payment. After spending DAYS trying to get through to the IRS on my own (seriously, I tried 9 times!), I used Claimyr and got a callback from the IRS in 45 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c. The IRS agent explained exactly how the underpayment penalty would be calculated in my case and confirmed I could use Form 2210 to show my income wasn't evenly distributed, which saved me hundreds in penalties.

I need to eat my words about Claimyr. After posting that skeptical comment, I was desperate enough to try it for my identity theft issue. Within 37 minutes (I timed it), I got a call back and was speaking with an actual IRS agent who specialized in identity theft cases. They confirmed I should definitely NOT make a withdrawal from my retirement accounts for the tax payment since that would create taxable income, potentially pushing me into a higher bracket. The agent walked me through making an estimated payment online right then and there, and explained how the Safe Harbor rule might help me avoid penalties. Honestly, it was the best $20 I've spent in years dealing with tax stuff.

Another option nobody's mentioned - you might qualify for an IRS payment plan if you can't pay the full amount by the filing deadline. The interest rates are usually lower than what you'd lose in potential growth by taking money out of your 401k. You can set up installment agreements online for balances under $50,000.

Just want to point out that if you do decide to withdraw from your 401k, remember that the plan administrator will usually withhold 20% for federal taxes, which might not be enough depending on your tax bracket. So you'd need to withdraw more than just the amount you owe the IRS to account for the taxes on the withdrawal itself.