Tax Law: Watch Out for Hidden Pension Penalties
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What is the main topic discussed in this episode?
Your Money Briefing. Money and Market Stories from The Wall Street Journal. I'm J.R. Whalen in New York. Surprises can be great, unless you're a pension recipient facing the possibility of surprise penalties as a result of the new tax law. We'll have details in a moment. First, these money headlines. You'd think the series of seven interest rate increases by the Federal Reserve since 2015 would have resulted in higher rates for bank deposit customers by now. Well, think again. In lieu of higher rates, lenders are offering new customers one-time payments of hundreds of dollars to open up accounts. Most large national and regional banks, including JPMorgan Chase, Wells Fargo, and SunTrust, are now offering bonuses to certain customers that typically range from $150 to $500.
It's all part of the growing desire to attract new primary checking and savings accounts. These customers are considered the most desirable because they rarely leave and are promising prospects for other product sales.
What surprise pension withholding change should retirees watch for under the new tax law?
Goldman Sachs analysts say that despite an expected rise in corporate earnings over the next several years, don't expect stock market gains to follow in lockstep. The analysts say that tightening monetary policy along with rising trade tensions and this fall's midterm elections are likely to keep the market gains in check. And the Wall Street Journal Real Estate Bureau reports that actor Rob Lowe and his wife are listing their 20-room home in Montecito, California for $47 million. The approximately 10,000-square-foot main house includes six bedrooms, formal living and dining areas, a home office, a screening room, a wine cellar, and a piano bar. Lowe bought the land in 2005 and built the home from scratch.
How much did typical pension payments increase and why could that cause underwithholding?
As a result of the land's elevation, Lowe's home was unaffected by the January fires and subsequent mudslides that impacted the area. This is your Money Briefing from The Wall Street Journal. Welcome back, everybody. There's a hidden surprise in the new tax law, and it's not the kind of surprise that will make pension recipients smile. Wall Street Journal tax reporter Laura Saunders is here to discuss. So, Laura, this has to do with a bump up in regular pension payments.
Well, that's right. Many people who receive pensions will notice that they rose this year. And that's good news because we always like to have more money in our pocket. But there could be a trap inside of it, which is that the pension withholding has been adjusted automatically to reflect changes from last year onwards.
How can pension, Social Security, 401(k) and IRA withholdings interact to create lumpy income?
in the tax overhaul, but the size of your bump up doesn't necessarily correspond to the tax cut you might be getting. And so next year, when it comes time to reckon up with Uncle Sam, you might find that you're underwithheld. And in some cases, people could even owe penalties. And so the moral of this story is that people should really go check their withholding this year of all years. They should go check their withholding and make sure that they're not going to be underwithheld next year.
And retirees will have to decide what to withhold from various sources, Social Security payments and payouts from retirement plans like 401Ks and IRAs.
We looked at a typical pensioner who has $50,000 a year in pension. That could be a schoolteacher or something. And the change is over the year about maybe $800 to $1,000 higher. But it's not clear that that's what your tax cut will be. And so that's why people need to go use the calculator to find out. But that leads to a larger issue, which is that for many people who have retired, especially when they're on the edge of retirement, when they just did it, income becomes very lumpy. And you're switching from once-a-year taxes because you were an employee to paying quarterly estimated taxes. And you've got all these sources of income like your pension, your Social Security, your 401K, your IRA distributions.
And they all have different kinds of withholding, and you're in charge of it. So it's a really good time to check in on that and see where you stand.
What are the rules and risks around quarterly estimated tax payments for recent retirees?
It really requires a lot of homework on the part of the recipient.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:00–0:58
2
What surprise pension withholding change should retirees watch for under the new tax law?
0:58–1:40
3
How much did typical pension payments increase and why could that cause underwithholding?
1:40–2:28
4
How can pension, Social Security, 401(k) and IRA withholdings interact to create lumpy income?
2:28–3:58
5
What are the rules and risks around quarterly estimated tax payments for recent retirees?
3:58–5:01
6
When can the IRS waive estimated-tax penalties and how do forms like 2210 help?
5:01–5:27
7
What practical steps should retirees take now to avoid hidden pension tax penalties?
5:27–5:42
Speakers
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