IRS Provides Solution for Retirees Who Missed Sept. 15 Tax Deadline
Retirees who missed the September 15 estimated tax deadline and underwithheld from their IRA distributions may still avoid penalties by taking corrective action before December 31, according to IRS guidelines. The standard withholding rate on IRA withdrawals often falls short of covering full tax obligations, especially for larger sums, leading to accumulating underpayment penalties tied to a quarterly federal interest rate plus three percentage points. The IRS allows retirees who request new distributions and direct significant portions toward federal withholding before year-end to retroactively apply the withheld amount against prior quarters' unpaid taxes. This method is effective only with traditional IRAs or pensions since Roth IRA withdrawals are not taxable. Taxpayers must meet a 90% threshold of current-year tax liability, or 100-110%, depending on income levels, to avoid penalties. Experts like Ed Slott emphasize the advantage of using withholding over estimated payments for retirees with uneven incomes because it is credited evenly across all four quarters. This approach offers a timing benefit that catch-up payments cannot match and may be especially critical for those who missed Q3 tax obligations.
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Topics: estimated tax payments IRA distributions IRS withholding rules