Paying taxes once a year by withholding from an IRA distribution

Crushed · October 20

Small hint that many people don't know about. We both have pensions Social security and IRAs. Because of DWs medical expenses I don't often know my tax situation till the end of the year. So I have no taxes withheld from the pensions or social security but instead pay the taxes as a withholding in December (both federal and state) directly from the IRA. When you pay estimated taxes as a withholding directly from an IRA no quarterly payments are required .

"Although estimated tax payments are considered made when you send in the checks — and must be paid as you receive your income during the year — amounts withheld from IRA distributions are considered paid evenly throughout the year, even if made in a lump sum payment at year-end.

So, if your RMD is large enough to cover your entire tax bill, you can keep your cash safely ensconced in the IRA most of the year, avoid withholding on other sources of retirement income, skip quarterly estimated payments . . . and still avoid the underpayment penalty.

Note that RMD withholding might not work when it comes to state estimated taxes because some IRA sponsors won't withhold state income taxes. Check this point with your IRA sponsor."
https://www.kiplinger.com/retirement/retirement-plans/required-minimum-distributions-rmds/603438/rmd-solution-for-estimated-taxes

It does not have to be an RMD

Note that when tax withholding is completed from a retirement account, it is treated as being made pro-ratably throughout the year. From a timing perspective, withholding from a retirement account distribution in January is treated the same as withholding from a distribution in December. Thus, there is no downside to waiting for withholding until late in the year, when you can accurately estimate the amount and earn more interest income.
https://www.wealthenhancement.com/s/blog/how-to-pay-taxes-in-retirement-with-tax-withholding-distributions-MCZONPZOTEFVHDLH4BYDSV5AKZIU

Ive been doing this for years
If you file joint returns you can use either spouses IRA
Example
You can do a $30,010.00 distribution
$10 to you
$30,000 split between federal and state income tax

cdgbdr · October 20

Good information

northernlady · October 20

Wow! This is the first year we have not managed our taxes. This is also the first year we've been dealing with the changes my husband is going through and taxes were the last thing on my mind. And I got stuck with a tax bill for the first time. Ugh.

Thanks for this information. I'm going to review the links you shared.

Mint · October 20

Interesting thank you

ImMaggieMae · October 21

We did that this year. It was the first year we got a small amount back on our taxes rather than having to pay. Of course we did actually pay, but just not at the end.