Retirees can avoid underpayment penalties by withholding federal taxes from a December RMD, treated as paid evenly across all quarters.
The IRS treats federal tax withheld from a required minimum distribution as paid evenly throughout the year, regardless of when the distribution occurs. This allows retirees to cover a full year of missed estimated tax payments with a single December withdrawal, avoiding underpayment penalties.
To qualify, withholding must meet 100% of last year’s tax liability, or 110% if prior-year adjusted gross income exceeded $150,000. Custodians typically require one to three weeks to process large distributions, making mid-December the effective deadline.
Higher Treasury yields have increased the cost of missing safe-harbor payments, amplifying the strategy’s relevance this year. The 10-year yield sits at 4.70%, near its highest level in recent years.