04 May Do I make estimated tax payments on IRA payout?
Q. I will be turning 72 this year and understand that I should take a Required Minimum Distribution (RMD) this year. If I delay the RMD until December, am I required to make quarterly federal estimated tax payments throughout the year or can I direct the financial institution to deduct income tax in December?
— Trying to do it right
A. Happy early birthday!
Required Minimum Distributions (RMDs) must begin by April 1 following the year a taxpayer turns 72.
So in your situation, you would not be required to receive your first RMD until April 1, 2022, said Neil Becourtney, a certified public accountant and tax partner with CohnReznick in Holmdel.
However, if you delay your first RMD until next year, then you will end up receiving two RMDs in 2022 because your second RMD would need to occur by Dec. 31, 2022, he said.
This could push you into a higher tax bracket, so you may want to receive your first RMD in 2021.
Now on the estimated taxes.
“Withholding is treated as paid ratably throughout the year regardless of when it takes place,” Becourtney said. “Accordingly, you can direct your financial institution to withhold federal as well as state income taxes on your RMD in December and possibly avoid having to make any quarterly estimated tax payments.”
To avoid a federal “underpayment of estimated tax” penalty, you must pay the lesser of 90% of your 2021 tax or 100% of your 2020 tax — or 110% if 2020 your adjusted gross income exceeded $150,000, Becourtney said.
To avoid a New Jersey underpayment of estimated tax penalty, you must pay the lesser of 80% of your 2021 tax or 100% of your 2020 tax.
“You can request additional withholding on your RMD that would cover the tax on other income, such as capital gains,” he said. “This needs to be coordinated with your financial institution. Often where taxes are withheld on an RMD, the federal withholding is only 10%, with no state withholding taking place.”
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This story was originally published on May 4, 2021.
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