How to use RMD for taxes?

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Stoic9
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How to use RMD for taxes?

Post by Stoic9 »

I just read an article that explains how to hold off paying taxes all year. Currently I have a good size pension/rentals/CG/dividends and will collect SS at 70. I have Federal taxes taken out every month to cover all these sources to pay my fed tax bill. According to RMD rules I can have zero taken out of my pension all year and have my RMD sent to the IRS in DEC and not be penalized. The IRS views RMD distro as an evenly distributed through the year even if all is taken at once.

Example my taxes are 23K a year. I currently have 2K a month taken from my Pension for FED taxes. When I turn 72 I can have zero taken from my pension each month and wait till DEC to take my RMD and just have it (24K) sent to IRS. This gives me my pension money every month and leaves my IRA money in the account all year.

SOURCE
https://www.msn.com/en-us/money/taxes/t ... d=msedgntp


Okay can anyone confirm or deny this?
BreadandButter
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Re: How to use RMD for taxes?

Post by BreadandButter »

Yes I have done this.
prd1982
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Re: How to use RMD for taxes?

Post by prd1982 »

Yes this works for Federal income taxes. You didn’t mention state income taxes. I know that this also works for my state. However, I believe some states (CA I think) requires the money to be withheld at the time the income is received.
AlwaysaQ
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Re: How to use RMD for taxes?

Post by AlwaysaQ »

I also pay taxes thru RMD withdrawal. I did find out at Fidelity I was only allowed to send 99% of a withdrawal to the IRS.
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ResearchMed
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Re: How to use RMD for taxes?

Post by ResearchMed »

We've done this when we didn't withhold enough due to extra consulting income. It also avoids the need for quarterly withholding.
That's because any Federal tax paid through *withholding* is always considered "timely" (assuming it's in the proper year, of course). So we'd take a withdrawal in late Nov or early Dec. Leaving it to the very end of December is risky in case something goes wrong, although that's never happened.

RM
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Alan S.
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Re: How to use RMD for taxes?

Post by Alan S. »

Not only do you defer paying annual taxes until late in the year, but by the time you take that RMD you will have a better idea of the most beneficial amount to withhold and this prevents over withholding due to unexpected events during the year. IRA custodian systems typically cap the withholding % at 99.

Of course, another benefit is that you do not have to handle the tax payments and determine how best to pay that money to the IRS, such as estimated taxes. The retirement plan custodian sends the money directly to the IRS. Foul ups are extremely rare, but distribution delays around year end holidays and vacations are still a potential issue. So if you are doing this I would not request the RMD distribution any later than 12/15, and preferably even earlier. A late distribution is much more costly with withholding than just a late RMD alone since a late RMD penalty is easily waived by filing a 5329. You would not want to risk having the withholding count for 2022 due to a January distribution.
dbr
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Re: How to use RMD for taxes?

Post by dbr »

I do this routinely. It can happen that the RMD does not cover the taxes so a person will have anticipated that with an estimated tax payment somewhere along the way. Note that you can pay money to your IRS account in any amount at any time by check, direct debit, or credit card, but withholding has the special property that whenever taken it covers all transactions in the year. It is also documented on your 1099.
Chuckles960
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Re: How to use RMD for taxes?

Post by Chuckles960 »

Forms such as 1099 and W-2 do not have any fields in which to specify how much in taxes was deducted when. They only report totals for the whole year. So until they change the forms, the feds and states are forced to assume that the reported payments were made in a "timely" manner.

My employer now allows me to change the federal W-4 deduction over the web, which makes it easier for me to adjust what is deducted when. This can be done with RMD also, but not with SS.

But if your December RMD and/or salary is not sufficient to pay the taxes still due, that's a problem.
Last edited by Chuckles960 on Tue Sep 14, 2021 3:22 pm, edited 3 times in total.
Juice3
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Re: How to use RMD for taxes?

Post by Juice3 »

Stoic9 wrote: Tue Sep 14, 2021 2:25 pm I just read an article that explains how to hold off paying taxes all year. Currently I have a good size pension/rentals/CG/dividends and will collect SS at 70. I have Federal taxes taken out every month to cover all these sources to pay my fed tax bill. According to RMD rules I can have zero taken out of my pension all year and have my RMD sent to the IRS in DEC and not be penalized. The IRS views RMD distro as an evenly distributed through the year even if all is taken at once.

Example my taxes are 23K a year. I currently have 2K a month taken from my Pension for FED taxes. When I turn 72 I can have zero taken from my pension each month and wait till DEC to take my RMD and just have it (24K) sent to IRS. This gives me my pension money every month and leaves my IRA money in the account all year.

SOURCE
https://www.msn.com/en-us/money/taxes/t ... d=msedgntp


Okay can anyone confirm or deny this?
This is a variation on the "erase and replace" loophole.

https://www.kitces.com/blog/estimated-t ... qus_thread

You appear to be skipping the replace step because you referred to your distribution as a RMD. It is possible to do even without RMD.

Edit: You imply your age is under 70 so you have no RMD. You can use the full erase and replace strategy if you are in a financial position to do so by taking an IRA distribution in the amount of your tax and sending to taxman at the end of each year after withholding nothing all year.
Last edited by Juice3 on Tue Sep 14, 2021 3:22 pm, edited 1 time in total.
Juice3
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Re: How to use RMD for taxes?

Post by Juice3 »

duplicate
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ResearchMed
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Re: How to use RMD for taxes?

Post by ResearchMed »

Chuckles960 wrote: Tue Sep 14, 2021 3:17 pm Forms such as 1099 and W-2 do not have any fields in which to specify how much in taxes was deducted when. They only report totals for the whole year. So until they change the forms, the feds and states are forced to assume that the reported payments were made in a "timely" manner.

My employer now allows me to change the federal W-4 deduction over the web, which makes it easier for me to adjust what is deducted when. This can be done with RMD also, but not with SS.

But if your December RMD and/or salary is not sufficient to pay the taxes still due, that's a problem.
ANY withholding is considered "timely", so what is reported by Employers on W2s for tax withholding doesn't need to bother with "how much tax was due - or paid - when during the tax year".

Does 1099 income have withholding? I thought that was simply for the total "paid", and it's the EmployEE's responsibility to pay the taxes and pay them timely. So that usually means 'quarterly estimated' taxes for many people. The point here is that by having taxes WITHHELD - be it from extra income tax withholding or IRA/etc., distributions being withheld, that can cover the taxes due for 1099 income.
Or... is some 1099 income subject to "withholding"?

RM
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scrabbler1
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Re: How to use RMD for taxes?

Post by scrabbler1 »

AlwaysaQ wrote: Tue Sep 14, 2021 2:44 pm I also pay taxes thru RMD withdrawal. I did find out at Fidelity I was only allowed to send 99% of a withdrawal to the IRS.
My friend has an inherited IRA through Fidelity and I help him take his RMD and figure out how much to withhold in federal and state income taxes. He doesn't need the RMD's income to pay his bills, so diverting some or all of it (99% of it, the max, as you pointed out) is like his W-2 withholding and it keeps him more easily in a "safe harbor" to avoid any penalties (and we keep his April-due balance low, either owing or getting a small amount (usually under $75).
Chuckles960
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Re: How to use RMD for taxes?

Post by Chuckles960 »

ResearchMed wrote: Tue Sep 14, 2021 3:35 pm
Chuckles960 wrote: Tue Sep 14, 2021 3:17 pm Forms such as 1099 and W-2 do not have any fields in which to specify how much in taxes was deducted when. They only report totals for the whole year. So until they change the forms, the feds and states are forced to assume that the reported payments were made in a "timely" manner.

My employer now allows me to change the federal W-4 deduction over the web, which makes it easier for me to adjust what is deducted when. This can be done with RMD also, but not with SS.

But if your December RMD and/or salary is not sufficient to pay the taxes still due, that's a problem.
ANY withholding is considered "timely", so what is reported by Employers on W2s for tax withholding doesn't need to bother with "how much tax was due - or paid - when during the tax year".
The point I was making is that because we know W-2 forms don't have a way to report what was paid when, we can deduce that any withholding must obviously be considered timely, because how could they determine otherwise?
ResearchMed wrote: Tue Sep 14, 2021 3:35 pm Does 1099 income have withholding? I thought that was simply for the total "paid", and it's the EmployEE's responsibility to pay the taxes and pay them timely. So that usually means 'quarterly estimated' taxes for many people. The point here is that by having taxes WITHHELD - be it from extra income tax withholding or IRA/etc., distributions being withheld, that can cover the taxes due for 1099 income.
Or... is some 1099 income subject to "withholding"?

RM
I believe RMDs including withholding are reported on a 1099-R. This is just one of the multiple variants of the 1099 form.
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ResearchMed
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Re: How to use RMD for taxes?

Post by ResearchMed »

Chuckles960 wrote: Tue Sep 14, 2021 3:52 pm
ResearchMed wrote: Tue Sep 14, 2021 3:35 pm
Chuckles960 wrote: Tue Sep 14, 2021 3:17 pm Forms such as 1099 and W-2 do not have any fields in which to specify how much in taxes was deducted when. They only report totals for the whole year. So until they change the forms, the feds and states are forced to assume that the reported payments were made in a "timely" manner.

My employer now allows me to change the federal W-4 deduction over the web, which makes it easier for me to adjust what is deducted when. This can be done with RMD also, but not with SS.

But if your December RMD and/or salary is not sufficient to pay the taxes still due, that's a problem.
ANY withholding is considered "timely", so what is reported by Employers on W2s for tax withholding doesn't need to bother with "how much tax was due - or paid - when during the tax year".
The point I was making is that because we know W-2 forms don't have a way to report what was paid when, we can deduce that any withholding must obviously be considered timely, because how could they determine otherwise?
ResearchMed wrote: Tue Sep 14, 2021 3:35 pm Does 1099 income have withholding? I thought that was simply for the total "paid", and it's the EmployEE's responsibility to pay the taxes and pay them timely. So that usually means 'quarterly estimated' taxes for many people. The point here is that by having taxes WITHHELD - be it from extra income tax withholding or IRA/etc., distributions being withheld, that can cover the taxes due for 1099 income.
Or... is some 1099 income subject to "withholding"?

RM
I believe RMDs including withholding are reported on a 1099-R. This is just one of the multiple variants of the 1099 form.
I was reacting to this sentence that you had written:

"So until they change the forms, the feds and states are forced to assume that the reported payments were made in a "timely" manner."
[emphasis added]

"...forced..."??

And it's not that we can "deduce" the timeliness of Federal taxes withheld. It's a given; no logical skills are required.

RM
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sport
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Re: How to use RMD for taxes?

Post by sport »

If you give money to charities, don't ignore the QCD option. The way I handle RMDs is to make QCD donations during the year. In late November, I determine how much in taxes I need to pay to meet the safe harbor. I use the previous year's tax amount. I then withdraw the balance of my RMD and have the taxes withheld for federal taxes. Unfortunately, Vanguard will not withhold taxes for my state, so we handle those differently. QCDs can count as part (or all) of your RMD and you escape taxes on that amount. In my state that also escapes state income tax. When you are subject to RMDs, QCDs lower your AGI, so there may be other tax advantages depending on your situation.
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