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November 5, 2010

You Can Use Your IRA to Pay Estimated Taxes

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Originally written December 21, 2011

If You Missed Estimated Tax Payment Deadlines, You can Use Withholding Tax From Your IRA to Avoid Penalties
Withholding from your IRA distribution can be used to satisfy your estimated tax requirements for the year, regardless of the time of year that the withholding occurs.
If you are required to pay estimated taxes, the payments must usually be made on a quarterly basis. Failure to make the quarterly payments may result in your owing the IRS penalties for underpayment of taxes. If you miss the deadlines by which these quarterly payments must be made, you can avoid the penalty by using the withholding tax from your IRA to pay the amount. Under the IRA withholding rules, any amount withheld (regardless of the date of the withholding) is treated as if it was withheld throughout the year. Therefore, if you owe estimated taxes of $1,000 and you request to have $1,000 withheld for federal income tax from your IRA distribution in December, you will be treated as if you have met the quarterly payment requirements. See IRS Publication 505 for detailed information about estimated taxes.

Updated October 23 to add the following

This strategy is usually recommended for someone who already planned to take withdrawals from a retirement account. For those who do want to make withdrawals, but want to use this strategy, the withdrawal can be made late in the year and rolled over the following year within 60-days. Of course, the rollover strategy can be used only if the amount is rollover eligible.

Talk to your tax professional before using this strategy. Only someone who knows the details of your tax and financial profile can recommend solutions that are suitable for you.

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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