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I'm hoping to take the big plunge into "R" next year and am wondering: I've read that you have to pay estimated income tax on your last year's earnings. My retirement income from savings etc., will only be around 40% of that. Do I take a really big hit on this years earnings or pay estimated taxes on what I will actually be drawing?
Thanks, Jim

If you do your taxes yourself, you'll have a problem unless your income comes in even monthly amounts. My 1999 income was split as follows: 20%, 9%, 11% and 60%. [The fourth quarter had mutual fund cap gains that are distributed in December] I've had similar splits in prior years and IRS bills you months later assuming that your income was evenly split.

The only way around it is to keep track of your income month-by-month and pay estimated taxes based on your actual income (taking withheld taxes into account). Then, at the end of the year, you need to fill out the unnecessarily complex Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts). I've been able to prove that I did NOT underpay and had the penalty removed. But it's extra work and a pain in the neck.

There is some leeway on paying estimated taxes and you have some wiggle room the first year you retire as one of the other posters has mentioned.

BTW, I'm not an accountant and I find that the Form 2210 gets easier to use each year, if that's any consolation.

--Hugh
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