Retirees often have various sources of income, including Social Security, pensions, retirement plans, and more. To avoid IRS penalties, they need to withhold taxes or make quarterly payments. While the quarterly deadlines for estimated taxes in 2024 are set for April 15, June 17, Sept. 16, and Jan. 15, 2025, there is a lesser-known strategy that can help cover taxes and comply with IRS regulations. This strategy involves using withholdings from required minimum distributions (RMDs) to correct missed tax payments.
Experts suggest that retirees can benefit from using RMDs to adjust their tax payments, especially when they sell investments or real estate that generate taxable gains. JoAnn May, a certified financial planner at Forest Asset Management, highlights the usefulness of this approach in managing taxes efficiently. Data from a recent Federal Reserve report shows that a majority of retirees have multiple sources of income, including pensions, interest, dividends, rental income, and earnings from a job. As retirees’ income increases, they may need to withhold more taxes or adjust their withholding amounts accordingly.
Advisors recommend withholding taxes from annual RMDs to cover taxes on all sources of income, typically closer to the end of the year. This strategy not only helps retirees meet their tax obligations but also allows them to receive credit for making tax payments throughout the year. Matthew Saneholtz, Chief Investment Officer and Senior Wealth Advisor at Tobias Financial Advisors, emphasizes the significance of this approach in maintaining a proactive tax strategy.
While estimating taxes for the fourth quarter may be relatively straightforward, it is crucial for retirees to track their income and tax liability throughout the year. This practice can influence other financial planning strategies and help retirees avoid potential issues with their tax payments. Planning RMDs in advance, as suggested by experts like JoAnn May, can provide retirees with the necessary time to address any tax-related concerns and ensure compliance with IRS regulations.
Starting in 2023, retirees must initiate RMDs by the age of 73, with the age increasing to 75 by 2033, as per Secure 2.0 regulations. The annual deadline for RMDs falls on Dec. 31 each year, with a 25% penalty imposed on missed or insufficient withdrawals. For individuals who turn 73, the deadline for their first RMD is extended to April 1 of the following year. By understanding these deadlines and penalties, retirees can proactively plan their tax payments and avoid unnecessary financial strain.
Leveraging required minimum distributions can be a smart tax strategy for retirees to manage their tax payments effectively and comply with IRS regulations. By utilizing RMDs to cover taxes on various sources of income, retirees can streamline their tax planning process and ensure timely payments throughout the year. Planning ahead, tracking income, and understanding key deadlines are essential components of this tax strategy, helping retirees navigate their financial obligations with confidence and precision.