Retirees often have multiple sources of income, and it is crucial for them to properly manage their taxes to avoid IRS penalties. In 2024, the quarterly estimated tax deadlines are April 15, June 17, Sept. 16, and Jan. 15, 2025. Failing to meet these deadlines can result in penalties, creating a financial burden for retirees. However, there is a lesser-known year-end strategy that can help retirees cover their taxes while adhering to IRS rules.
One effective way for retirees to correct missed tax payments is through withholdings from required minimum distributions (RMDs). RMDs are mandatory yearly withdrawals from pretax retirement savings. By using RMDs to cover taxes, retirees can ensure compliance with IRS regulations and avoid penalties. This strategy is particularly beneficial for retirees who sell investments or real estate that generate taxable gains.
While Social Security benefits are a common source of retirement income, many retirees also receive income from pensions, interest, dividends, rental properties, and part-time employment. As retirees’ income increases, so do their tax obligations. It is important for retirees to adjust their withholdings accordingly to meet their tax requirements throughout the year.
Some financial advisors recommend covering all sources of income taxes through a withholding from annual RMDs. By doing so, retirees can receive credit for making tax payments throughout the year, even if they only withhold taxes closer to year-end. This approach simplifies the tax process and ensures that retirees are compliant with IRS regulations.
It is essential for retirees to track their income and tax liability throughout the year to effectively plan for RMDs. By completing RMDs in advance, retirees can address any potential issues and avoid penalties for missed or insufficient withdrawals. Since 2023, retirees are required to start RMDs by age 73, with the age increasing to 75 starting in 2033.
Retirees must meet the annual RMD deadline of Dec. 31 to avoid a 25% penalty on the amount they should have withdrawn. In cases where retirees miss the deadline or do not withdraw a sufficient amount in a given year, penalties may apply. The first RMD deadline is extended to April 1 after turning 73, providing retirees with additional time to meet their obligations.
By leveraging RMDs and strategically managing their tax withholdings, retirees can maximize their retirement income and minimize their tax liabilities. It is crucial for retirees to stay informed about tax deadlines and regulations, as well as to seek advice from financial experts to ensure a secure and stable financial future in retirement.
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