Age 72 is an important milestone for IRA owners. It’s the so-called “day of reckoning” when the IRS begins collecting taxes on your deferred retirement savings. Fortunately, this event also triggers some tax-planning opportunities. Note: effective 1/1/2020, the SECURE Act changed the required age from 70.5 to age 72. However, qualified gifts to charity (QCDs) from most retirement accounts can still be made starting at age 70.5.
If you have income each year that normally requires paying quarterly tax estimates, you may be able to use your required minimum distribution (RMD) to pay some of your taxes. You simply elect tax withholding from the distribution in the amount that you need. For example, if your IRA RMD is $20,000 this year, you could ask your IRA custodian to withhold 100% of your RMD for taxes. This is equivalent to paying $20,000 spread out over four quarterly payments of $5,000 each.
With all else being equal, your income could be higher in the year of your first RMD because the IRA withdrawal itself is usually taxable. Using the figures above, if your income is $20,000 higher due to the RMD and you are in the 22% tax bracket, you will owe an additional $4,400 in tax ($20,000 * 0.22%). If you were not required to pay quarterly estimates beforehand, you may just need to have 22% of your IRA RMD withheld for income taxes. If you had been paying quarterly, you now have $20,000 that must be withdrawn and taxed anyway, which can be used to pay all or a portion of your tax.
Another benefit is that your withdrawal can be postponed until the end of the year, giving your money more time to grow (if the stock market cooperates) before you send any funds to the IRS. You are credited for the taxes paid during the year no matter when the withdrawal and withholding is done. This is similar to taxes withheld during the year, as reported on an employee’s Form W‑2. IRA withdrawals are reported on IRS Form 1099‑R, along with the amount of tax withheld.
Consider consulting a professional if you have income over $150,000 or if you are also paying state and local taxes through quarterly payments. Our team of experienced wealth advisers can help you navigate questions and special circumstances that may necessitate you continuing to pay these taxes quarterly.