Using an IRA Distribution and Withholding to Reduce Estimated Tax Payments
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Here’s a little-known tax tip for IRA distributions: Taxes withheld from an IRA distribution are treated by the IRS as if they were withheld evenly throughout the year, regardless of when the distribution occurs. This can help you avoid penalties for underpayment, even if you withhold taxes late in the year.
READ THE ARTICLEFor example, if most of your income was received early in the year, you could wait until late December to take an IRA distribution, withhold enough tax, and still avoid penalties. This method is especially useful if you have uneven income or tax burdens. Anyone with access to IRA funds, including those required to take distributions (e.g., individuals over age 73 or beneficiaries of inherited IRAs), can use this strategy.
What to know: This process involves instructing your IRA custodian to distribute enough funds and withhold taxes using form W-4P. However, there is a downside to be aware of: If you pass away before making the distribution, your estate could face penalties for underpayment of estimated taxes.