Retirees face the challenge of managing their income sources to ensure they are meeting their tax obligations to the IRS. The quarterly estimated tax deadlines can be a burden, but there is a lesser-known year-end strategy that can help retirees cover their taxes while still staying compliant with IRS rules. Experts recommend using required minimum distributions (RMDs) to correct missed tax payments, offering a convenient solution for retirees with pretax retirement savings.
While Social Security benefits are a common source of retirement income, many retirees also have a pension, income from interest, dividends, rental properties, or even earnings from a job. As retirees’ income sources increase, so do their tax obligations. Withholding the right amount of taxes or making timely quarterly payments becomes crucial to avoid penalties from the IRS.
One tax-saving strategy involves using withholdings from annual RMDs to cover taxes on other sources of income. By withholding from RMDs closer to year-end, retirees can ensure they are meeting their tax obligations without having to worry about quarterly deadlines. This tactic can also be beneficial for retirees who realize they haven’t paid enough taxes throughout the year or need to adjust their withholdings.
Creating an estimated tax projection by the fourth quarter can provide clarity on your tax liability for the year. However, it is essential to monitor your income and tax situation throughout the year to make informed decisions on tax planning. Financial advisors suggest completing RMDs in November to allow ample time for any necessary adjustments.
Retirees must start taking RMDs by age 73, as per the Secure 2.0 changes, and this age requirement will increase to 75 starting in 2033. The annual deadline for RMDs is December 31st, and missing this deadline or failing to take out the required amount can result in a 25% penalty on the amount you should have withdrawn. For those starting RMDs, the first deadline is extended to April 1st after turning 73.
By leveraging strategic tax planning and utilizing RMDs to cover tax obligations, retirees can maximize their tax savings and stay compliant with IRS regulations. It is crucial for retirees to stay proactive in managing their income sources and tax liabilities to make the most of their retirement funds. With careful planning and the right strategies in place, retirees can navigate the complex tax landscape in retirement with confidence.
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