paying taxes in 2020 when RMDs are suspended

Submitted by barbara rosen on Thu, 2020-09-17 23:14

In years prior to this, I have taken RMDs during the fourth quarter of the year, and had money withheld for Federal and state taxes. I withheld enough to meet the safe harbor of taxes paid from the year before. What happens in 2020 when RMDs have been suspended? I plan to skip 2020 RMDs since I have non-retirement funds with which to pay taxes due. I need information about how and when to do so without penalties, Do I make fourth quarter estimated payment before 1/15/21? Taxes, of course, will be much lower than prior year, so do I have to be concerned about meeting safe harbor? Any other way of handling this?



Submitted by Alan - IRA critic on Fri, 2020-09-18 00:11

Your safe harbor for 2020 will be 90% of your 2020 tax liability, since that will be less than 100% or more of your 2019 tax liability. You may also find that the taxable portion of your SS benefit is much lower, and your total tax liability might be less than 1,000 and you will not use a penalty. But if you do, the underpayment rate is now only 3%, and may not be enough to bother trying to avoid. If you get a private pension, you might be able to increase withholding for the rest of the year, and that may be enough. First step is to determine how much of a shortfall from the 90% of current year tax liability you are looking at. If you need to you could send in a 3rd Q and 4th Q estimate to limit the penalty.



Submitted by David Mertz on Fri, 2020-09-18 00:38

  • Note that while tax withholding, no matter when it occurs during the year, is treated by default as having been withheld in equal amounts throughout the year.  That’s not the case with estimated tax payments which apply when actually paid, so it’s possible for there to be a penalty for earlier quarters even if estimated taxes paid in later quarters is sufficient to cover your overall tax liability if you received other taxable income in the earlier quarters.  You would have to take into account your overall tax situation to see if this might happen.  If it does, a way around this might be to take a distribution from the retirement account and have a majority of it withheld for taxes, then use money from another source to complete the rollover of the entire gross amount of the distribution.  However, if the rollover is IRA-to-IRA, the one rollover per 12 months limitation would apply, so that’s something to consider.
  • Given that you might have an unusually low taxable income for 2020, you might consider doing a Roth conversion if the conversion would be at a lower tax rate than would normally apply, but again, you need to consider your overall tax situation.  If tax underpayment for earlier quarters is a concern, you could to the Roth conversion indirectly to similar to the indirect rollover that I mentioned above, substituting other funds for the amount withheld for taxes.


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