Managing taxes can be a daunting task for retirees who have income from various sources such as Social Security, pensions, retirement plans, or other investments. The quarterly estimated tax deadlines for 2024 might seem like a hassle, but there is a lesser-known strategy that can help retirees cover their taxes efficiently. Experts suggest utilizing required minimum distributions (RMDs) to correct missed tax payments and satisfy IRS rules.
Required minimum distributions are mandatory yearly withdrawals that apply to pretax retirement savings. Retirees can use these withdrawals to withhold taxes and manage their tax payments effectively. This strategy is particularly beneficial when retirees sell investments or real estate that trigger taxable gains. By leveraging RMDs for tax purposes, retirees can ensure that they meet their obligations without facing IRS penalties.
Retirees often have income from diverse sources, including Social Security benefits, pensions, interest, dividends, rental income, and earnings from a job. As income increases, retirees may need to adjust their tax withholdings to avoid underpayment. Withholding taxes from annual RMDs can help retirees streamline their tax payments and stay compliant with tax regulations throughout the year.
While taxes typically need to be paid by quarterly deadlines, retirees can adopt a year-end tax planning strategy to cover their levies from all income sources using RMD withholdings. By making tax payments through RMDs closer to the end of the year, retirees can effectively manage their tax liabilities and ensure that they are on track with their payments. This approach allows retirees to receive credit for making tax payments throughout the year, even if they only do it in December.
It is essential for retirees to track their income and tax liability throughout the year to facilitate tax planning and avoid any issues with RMDs. By completing RMDs in November, retirees can allow ample time to address any tax-related concerns or make necessary adjustments. With changes enacted by Secure 2.0, most retirees must start RMDs by age 73 since 2023, with the age increasing to 75 starting in 2033. The annual deadline for RMDs is Dec. 31, and missing or underestimating withdrawals can result in a 25% penalty on the required amount.
Retirees can benefit from utilizing required minimum distributions to manage their tax payments efficiently and stay compliant with IRS regulations. By leveraging RMDs for tax purposes and adopting strategic year-end tax planning, retirees can streamline their tax liabilities and ensure that they meet their obligations without facing penalties. It is crucial for retirees to track their income, plan their tax withholdings effectively, and prepare for RMDs to avoid any tax-related issues and remain on top of their financial responsibilities.