RMDS and Estimated Taxes

[carlben1949]

Can I apply all my RMD distributions (which i take in December) to my Federal taxes instead of making Quarterly federal estimated tax payments if my RMD distributions cover my safe harbor federal estimated taxes requirements?

[TomYoung]

How do you intend to "apply" the distribution to your taxes?  Using the money to make a 4th quarter estimated tax payment in January, or try and have the entire amount withheld by the custodian?  The latter credits the payment evenly over the 4 quarters in the "first cut" calculation while the former credits the payment entirely to the 4th quarter.

Can you apply the RMD to federal taxes?  Of course you can.

Should you apply the RMD to federal taxes?  That's one of those "it depends" sort of answers.  I assume the underpayment penalty is the unstated focus of your question?  You'd have to sit down and run the numbers to answer that, using both the "normal" calculation and then again by "annualizing."

[dmertz · Accepted solution]

In general, yes, you can apply all of your RMD as tax withholding.  However, some custodians place an upper limit on the percentage of your distribution that they will allow to be withheld, so check with the custodian.

Tax withholding is preferable to paying estimated taxes because tax withholding, by default, is treated as applying in equal parts to each of the tax quarters of the year, while estimated tax payments are credited when paid.  Applying a large part of the distribution as tax withholding can help reduce or eliminate an underpayment penalty that you might otherwise have for underpayment in earlier quarters of the year.  This can also help eliminate the need to annualize your income on Form 2210.

[ethanruth]

Can I transfer my RMD to my Roth?

[dmertz]

You can use your RMD to subsidize a new contribution to a Roth IRA if you are eligible to contribute to a Roth IRA (modified AGI not over the limit and you have sufficient compensation), but you are not permitted to roll over or convert your RMD to a Roth IRA.

[poppacat]

I can't find any IRS reference about paying all of one's estimated taxes for the year through withholding by an IRA plan sponsor and having those estimated taxes treated as if they were paid throughout the year, even if the RMD distribution is in December.  I like to have documentation.  Can anyone refer me to an IRS document that states that this is the case?  

[Critter-3]

Withholding from a paycheck or a retirement/IRA account is considered taken in even quarterly distributions even if you take it all in December  unless you wish to use the actual amounts per month ... so if you make the payment all in January this may make a difference as opposed to all in Dec  ... this is a common income tax strategy folks have used for years.  Review the form 2210 AI  instructions for line 19 :  

When figuring your payment dates and the amounts to enter on
line 19 of each column, apply the following rules.
• For withheld federal income tax and excess social security or tier
1 railroad retirement tax (RRTA), you are considered to have paid
one-fourth of these amounts on each payment due date unless you
can show otherwise.

https://www.irs.gov/pub/irs-prior/i2210--2019.pdf

[dmertz]

The withholding being treated as withheld evenly throughout the year by default is in section 6654(g) of the tax code which is reflected in the calculations on Form 2210.

[poppacat]

Thank you.

[w-burnham]

I looked at the statutory provision (16 USCA s6654(g)) and it says "in case of tax withheld on *wages*" that "an equal part of such amount shall be deemed paid on each due date for such taxable year." Either I have the wrong section or withholding from RMDs from IRAs etc. counts as withholding from wages. Do you know?

[w-burnham]

Sorry. I meant *26* USCA s6654(g).

[dmertz]

I'm not sure if there are other sections of the tax code that indicate to treat withholding from other sources as if they were withholding from wages for this purpose, but the instructions for line 19 of Form 2210 say to apply all withholding in the same way:

For withheld federal income tax and excess social security or tier 1 railroad retirement tax (RRTA), you are considered to have paid one-fourth of these amounts on each payment due date unless you can show otherwise.   You’ll find these amounts on the following lines.
° Form 1040 or 1040-SR, line 25d;
° Form 1040-NR, lines 25d, 25e, 25f, and 25g;
° Also, Schedule 3 (Form 1040), line 10, if you filed the above forms;
° Form 1041, Schedule G, line 14.

[w-burnham]

I looked it up in the relevant reg defining wages, 26 CFR §31.3401(a)-1, and it seems to say that “pensions and annuities” are wages:

“(b) Certain specific items - (1) Pensions and retirement pay. (i) In general, pensions and retired pay are wages subject to withholding. However, no withholding is required with respect to amounts paid to an employee upon retirement . . . "

[w-burnham]

Another question occurs to me: can you make this work with estimated tax payments? I.e. assume that your only income in 2021 is an RMD of $100,000. Can you wait and take the RMD in December, not make any quarterly payments until the 4th quarter, and pay the amount of your full tax as an estimated payment for the 4th quarter?

[dmertz]

Estimated tax payments are always treated as made on the date that they are made.  Again reference the instructions for line 19 of Form 2210.