I understand that amounts withheld from RMDs for taxes are treated as taxes paid over the entire year eliminating the need to pay quarterly estimated tax payments. I am wondering if my wife and I can stop paying taxes on all our income (state pensions, capital gains, interest, and dividends) an pay our entire taxes owed at the end of the year with our RMDs with no penalty as long as we meet safe harbor requirements?
For Federal taxes, this plan works perfectly because the IRS treats tax withholding as if it were paid evenly throughout the year.
Be sure to take your RMDs by year-end, because a distribution even on January 1 of the following year is considered "late".
However, there are three things to verify before you cancel your quarterly payments:
Therefore, be sure to check with your custodian if you can withhold an amount for state income tax from your RMD, even if that distribution is exempt from state tax.
Although there is no requirement for the payers to do so, just be aware that some payers limit the percentage of the distribution that they will permit to be allocated to tax withholding. Check with the particular financial institution that holds the retirement account.
One additional item to consider with this is that you may have to file your return by mail. Although things could change for future filing years, presently the IRS does not accept e-filed returns when withholding is equal to or greater than half of the distribution amount on a 1099-R. The taxpayer must file by mail and submit a paper copy of the 1099-R showing this withholding.