Strategic tax planning for retirees

Retirees may get income from Social Security, a pension, a retirement plan, or other sources, and they are often required to withhold taxes or make quarterly payments to avoid IRS penalties.

For 2024, the quarterly anticipated tax deadlines are April 15, June 17, September 16, and January 15, 2025. According to experts, a lesser-known year-end technique can pay your taxes while still complying with IRS requirements.

Certain retirees can make up missed tax payments by withholding from necessary yearly withdrawals, known as required minimum distributions, or RMDs. These withdrawals typically affect pretax retirement funds.

"It's very helpful," especially when retirees sell investments or real estate that result in taxable profits, says JoAnn May, a certified financial planner with Forest Asset Management in Riverside, Illinois.

One of the key advantages of using RMDs to cover tax liabilities is the flexibility it offers retirees in managing their finances. By strategically timing these withdrawals, retirees can potentially minimize the impact on their overall tax bracket, ensuring they retain more of their hard-earned savings. This approach not only aids in tax compliance but also aligns with broader financial planning goals, such as estate planning and wealth preservation.

While Social Security is the most prevalent source of retirement income, 56% of pensioners had a pension in 2023, according to a recent Federal Reserve analysis. Meanwhile, nearly half of retirees earned money via interest, dividends, or rentals, while around one-third earned money from work, according to the Fed data. Experts note that as income rises, retirees usually need to withhold more taxes or increase their withholdings.

The complexity of managing multiple income streams in retirement cannot be understated. Retirees often face the challenge of balancing their cash flow needs with tax obligations, which can be particularly daunting without professional guidance. Financial advisors play a crucial role in helping retirees navigate these waters, offering tailored strategies that consider both immediate needs and long-term financial health.

Utilize your desired minimum dispersion. Typically, taxes must be paid by quarterly deadlines. However, some advisors will cover a client's taxes for all sources of income by withholding from annual RMDs, which are often due around the end of the year.

The similar technique can be utilized by retirees who discover that they did not withhold the appropriate amount of tax from other income or did not pay enough through anticipated payments.

"You're getting credit for making tax payments throughout the year, even if you only did it in December," explained CFP Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Financial Advisors in Plantation, Florida.

Moreover, the implications of the Secure 2.0 Act are significant for retirees navigating RMDs. With the age for mandatory withdrawals gradually increasing, retirees have more time to plan their distributions strategically. This legislative change offers an opportunity to recalibrate retirement strategies, potentially reducing the tax burden and optimizing retirement income streams. Understanding these nuances is vital for retirees aiming to maximize their financial security.

In general, estimating tax projections becomes easier by the fourth quarter. However, he emphasized the importance of tracking income and tax liability throughout the year, since this can affect other planning efforts.

May of Forest Asset Management, who also advocates the technique, routinely completes RMDs in November to provide time to address any difficulties. According to revisions implemented by Secure 2.0, most retirees must begin RMDs by the age of 73 beginning in 2023, and this age will rise to 75 beginning in 2033.

Failing to adhere to RMD requirements can result in substantial penalties, underscoring the importance of timely and accurate withdrawals. Retirees should be proactive in understanding their obligations and seeking professional advice if needed. By staying informed and engaged with their financial planning, retirees can better safeguard their assets and ensure a stable financial future.

The annual RMD deadline is December 31. If you miss the withdrawal deadline or do not withdraw enough in a given year, you will be penalized by 25% of the amount you should have withdrawn. The deadline for your first RMD is extended to April 1 of the year following your 73rd birthday.