23 May RMDs, estimated taxes and cash flow

Q. I have to make quarterly tax payments and then take a Required Minimum Distribution (RMD) in December and I want to have more balanced monthly payments. How can I even out my monthly cash flow in retirement?
— Retired

A. It takes some planning to create your own “salary” in retirement, and having steady cash flow is a huge part of that job.

Taxes must be part of that equation.

As you know, estimated quarterly tax payments must be made on time, said Chip Wieczorek, a certified financial planner and investment adviser with Tradition Capital Management in Summit.

If you don’t make the payments on time, you may be assessed interest or an underpayment penalty.

“Some of this estimated tax is attributed to IRA distributions from which a certain percent state and federal tax can be taken, and some is from other sources of income,” he said.

Your tax estimates may come from your personal resources: checking, savings and such.

“You may be able to reduce or eliminate entirely your quarterly payments by taking the entire amount out of your IRA RMD,” Wieczorek said.

For example, he said, if an individual owes $30,000 between state and federal taxes for the year and his RMD is about the same or greater, you can take the whole tax amount out of your RMD — for example, 80 percent for federal withholding and 20 percent for state withholding.

Wieczorek said there is no assigned time to withdraw from the IRA during a year, so even a December withdrawal is “on time” for the tax withholding — unlike your quarterlies. He said you could wait until year-end to get this done.

“You get to keep more of your personal cash every quarter which will help even out your monthly cash flow,” he said.

Consider meeting with a tax advisor or financial planner to go over the specifics of your situation.

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This post was first published in May 2016.