The RMD Withholding Move a 74-Year-Old Used to Erase Four Quarterly Tax Payments
Margaret spent years writing quarterly checks to the IRS, sweating every deadline, until she discovered a withholding quirk buried in the tax code that let her cancel all four payments at once with a single year-end move.
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Consider a retiree we’ll call Margaret, age 74, who spent years marking her calendar for April, June, September, and January estimated tax deadlines. Her income is predictable in shape but not in timing: Social Security, a pension, dividends in a taxable brokerage account, and a required minimum distribution from a traditional IRA. Every quarter she wrote a check to the IRS. Some years the total came out right and she still owed a small underpayment penalty because one quarter had been light. Last year she stopped writing those checks entirely, and the IRS was fine with it.
She is not a real person, but the move is real, legal, and widely used. It hinges on a quirk in how the IRS treats withholding from retirement account distributions versus estimated payments.
Why Quarterly Estimates Create Problems Even When the Total Is Right
Estimated tax payments are credited on the date you pay them. Miss a quarter, or pay less in one quarter than the IRS safe harbor requires, and you can owe an underpayment penalty on Form 2210 even if your full-year total is correct. The penalty rate is tied to the federal short-term rate plus three percentage points, and with the Fed funds upper bound sitting at 3.75% as of the end of August, that penalty is not trivial.
For retirees whose income is lumpy (a big capital gain in Q3, a Roth conversion in Q4, an RMD taken late in the year) the quarterly system is a trap. You often don’t know your real tax liability until December. It is one of several IRS rules that quietly drain retirement accounts, and we mapped the rest in a free tax trap guide for retirees.
A Withholding Rule That Changes the Math
Federal income tax withheld from a retirement account distribution is generally treated as if it were paid evenly throughout the tax year, regardless of when the withholding actually occurred. Estimated payments are credited when paid. Withholding is credited ratably.
That distinction is the entire strategy. A retiree taking a required minimum distribution in December can direct a large share of that distribution to federal withholding, and the IRS will treat it as though one-quarter of that tax was paid in each of the four quarters. One transaction, four deadlines covered.
How the Move Works in Practice
Late in the year, once income is largely known, the retiree calculates their expected full-year federal tax liability. When they request their RMD from the IRA custodian, they specify a federal withholding percentage large enough to cover that liability. The custodian sends the withheld portion to the IRS and the rest to the retiree.
Timing matters. Taking the RMD in November or December means the retiree has a full picture of the year’s dividends, pension income, Social Security, and capital gains. RMDs must be taken by December 31, so waiting until late in the year fits the rule and the strategy.
Rules to keep in mind: RMDs generally must begin at age 73, apply to traditional IRAs and employer plans like 401(k) and 403(b), and do not apply to Roth IRAs while the owner is alive. Missing an RMD can trigger a 25% excise tax, reduced to 10% if corrected within two years. The distribution itself is taxed as ordinary income.
Caveats Worth Stating Plainly
- You receive less cash. Withholding comes out of the distribution before it hits your bank account. If you were counting on the full RMD for living expenses, size the withholding accordingly and plan the cash flow.
- You have to estimate correctly. The move only works if the withheld amount covers the safe harbor: generally 100% of last year’s tax (110% for higher earners) or 90% of the current year’s tax. Undershoot and you’re back to a penalty.
- State taxes are a separate question. Withholding rules vary by state, and some states don’t allow withholding from IRA distributions at all. Check before assuming the same trick works at the state level.
- Prior estimated payments still count. If you already sent Q1 and Q2 checks before switching strategies, factor those in so you don’t over-withhold.
- The distribution must be large enough. If your RMD is small relative to your tax bill, you may need to combine RMD withholding with a modest year-end estimated payment.
Who This Doesn’t Help
Anyone not yet 73 isn’t taking RMDs and can’t use this specific version of the move. Retirees whose retirement savings are entirely in Roth accounts don’t have RMDs during the owner’s lifetime and don’t have taxable distributions to withhold from.
What to Do First
Pull last year’s Form 1040 and Form 2210 if you filed one. If you paid an underpayment penalty, or if quarterly estimates are a source of anxiety, this move is worth a serious look before your next RMD. Ask your IRA custodian what withholding percentages they allow and how late in December they can process a distribution with custom withholding. The IRS.gov pages on estimated taxes and underpayment of estimated tax spell out the safe harbors; the ratable-treatment rule for withholding is discussed in the Form 2210 instructions.
The withholding rules have worked this way for a long time, and using them deliberately is the whole point.
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