Retirees often face challenges when it comes to managing their taxes, especially with multiple sources of income such as Social Security, pensions, retirement plans, and other investments. The IRS requires retirees to either withhold taxes or make quarterly payments to avoid penalties. The quarterly estimated tax deadlines for 2024 are April 15, June 17, Sept. 16, and Jan. 15, 2025. However, there is a lesser-known year-end strategy that can help retirees cover their taxes while still complying with IRS rules. One effective way to address missed tax payments is through withholdings from required minimum distributions (RMDs).
RMDs are mandatory yearly withdrawals that apply to pretax retirement savings. These withdrawals can be utilized to correct missed tax payments for retirees. By strategically planning RMDs, retirees can ensure that they fulfill their tax obligations while also managing their cash flow efficiently. JoAnn May, a certified financial planner at Forest Asset Management, highlights the significance of leveraging RMDs for tax payments, especially when retirees encounter taxable gains from selling investments or real estate.
A diverse range of income sources is common among retirees, with Social Security benefits, pensions, interest, dividends, rental income, and earnings from a job being some of the most prevalent sources. As retirees’ income increases, the need to withhold more taxes or adjust withholdings becomes essential. While taxes are typically paid by quarterly deadlines, some advisors recommend covering a client’s tax liabilities for all income sources through withholdings from annual RMDs, which usually occur towards the end of the year.
Strategic tax planning plays a crucial role in helping retirees manage their tax obligations effectively. By utilizing RMDs for tax payments, retirees can spread out their tax liabilities throughout the year, even if they make the payments closer to year-end. This approach allows retirees to receive credit for making tax payments consistently, irrespective of the timing. Matthew Saneholtz, Chief Investment Officer and Senior Wealth Advisor at Tobias Financial Advisors, emphasizes the importance of tracking income and tax liability throughout the year to facilitate tax projections by the fourth quarter.
Since most retirees must begin RMDs by age 73, based on changes enacted by Secure 2.0, it is crucial to adhere to the annual December 31 deadline for RMDs. Failure to withdraw the required amount or missing the deadline can result in a 25% penalty on the amount that should have been withdrawn. The deadline for the first RMD is extended to April 1 after turning 73, providing retirees with a grace period to initiate the withdrawal process.
Optimizing tax strategies for retirees involves a combination of proactive planning, leveraging RMDs, and ensuring compliance with IRS regulations. By utilizing RMDs for tax payments and monitoring income throughout the year, retirees can effectively manage their tax liabilities and avoid potential penalties. Seeking guidance from financial professionals can further enhance retirees’ tax planning strategies and optimize their retirement income management.
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