An effective strategy for required withdrawals in retirement can prevent IRS penalties.

• If you have multiple sources of income and are retired, you must withhold taxes or make quarterly payments to avoid penalties from the IRS.
• Some retirees can rectify missed tax payments through withholdings from RMDs.
• Experts suggest that tax withholdings from RMDs are considered timely payments, even if used to settle taxes from prior quarters.

Retirees often receive income from various sources, including Social Security, pensions, retirement plans, and other sources. To avoid IRS penalties, they must either withhold taxes or make quarterly payments.

Experts suggest a lesser-known year-end strategy that can cover taxes while still adhering to IRS rules for the 2024 quarterly estimated tax deadlines, which are April 15, June 17, Sept. 16, and Jan. 15, 2025.

Pretax retirement savings typically require retirees to make mandatory yearly withdrawals, known as RMDs, which can be used to correct missed tax payments.

Here's how to use required retirement withdrawals to enhance your portfolio.

JoAnn May, a certified financial planner at Forest Asset Management in Riverside, Illinois, stated that it is particularly helpful for retirees to sell investments or real estate that trigger taxable gains.

In 2023, a recent Federal Reserve report revealed that 56% of retirees in addition to receiving Social Security benefits, also had a pension.

Nearly half of retirees earned income from interest, dividends, or rental income, while about one-third had earnings from a job, according to a Fed report.

Experts suggest that as income rises, retirees often have to increase their tax withholdings or reduce their taxable income.

Leverage your required minimum distribution

While taxes must typically be paid by quarterly deadlines, some advisors can cover a client's taxes from all sources of income through a withholding from annual RMDs, which usually occur closer to year-end.

Retirees who discover that they didn't withhold enough tax from other income or didn't make enough estimated payments may face penalties and interest on any unpaid taxes.

CFP Matthew Saneholtz, chief investment officer and senior wealth advisor at Tobias Financial Advisors in Plantation, Florida, stated that you are still receiving credit for making tax payments throughout the year, even if you only completed them in December.

It's easier to estimate tax liability by the fourth quarter, but it's crucial to monitor income and tax obligations throughout the year, which can impact other planning strategies, he stated.

Typically, May from Forest Asset Management, who recommends the strategy, completes RMDs in November to allow time for fixing any issues.

Starting in 2033, the age at which most retirees must begin RMDs will increase from 73 to 75, as per changes enacted by Secure 2.0.

The deadline for RMDs is December 31. If you fail to withdraw the required amount or take less, you will be subject to a 25% penalty on the amount you should have withdrawn. Your first RMD deadline is extended to April 1 of the year you turn 73.