Retirees often have various sources of income, such as Social Security, pensions, retirement plans, or other investments, which may require them to withhold taxes or make quarterly payments to the IRS to avoid penalties. While the quarterly estimated tax deadlines for 2024 are April 15, June 17, Sept. 16, and Jan. 15, 2025, there is a lesser-known year-end tax planning strategy that can help retirees stay compliant with IRS rules.
One effective strategy for retirees is to correct missed tax payments by making withholdings from mandatory yearly withdrawals, known as required minimum distributions (RMDs). These withdrawals typically apply to pretax retirement savings and can be a useful tool for managing tax liabilities.
Diversification of Retirement Income
While Social Security benefits are a common source of retirement income, a recent Federal Reserve report revealed that 56% of retirees also had a pension in 2023. Additionally, nearly half of retirees had income from interest, dividends, or rental properties, and roughly one-third had earnings from a job. As retirees’ income increases, it becomes essential to adjust withholdings and tax payments accordingly.
Some advisors recommend covering a client’s tax liabilities from all sources of income by withholding from annual RMDs, which typically occur closer to year-end. This strategy can be particularly useful for retirees who need to make up for insufficient withholdings from other income or missed estimated tax payments throughout the year.
Ensuring Proper Tax Projection
While an estimated tax projection may be easier by the fourth quarter, it is crucial for retirees to track their income and tax liability throughout the year. This information can impact other financial planning strategies and help avoid potential issues with tax compliance.
Complying with RMD Deadlines
Since most retirees must start taking RMDs by age 73, based on changes enacted by Secure 2.0, it is important to be aware of the annual Dec. 31 deadline for RMDs. Missing a required withdrawal or not taking a sufficient amount can result in a 25% penalty on the amount that should have been withdrawn.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 the year in which the retiree turns 73.
Proper tax planning is crucial for retirees to avoid IRS penalties and ensure compliance with tax regulations. By utilizing RMDs for tax payments and staying informed about income and tax liability, retirees can effectively manage their tax obligations and potentially improve their financial outlook in retirement.