RMD – No withholding
I usually have federal and state taxes withheld from my RMD. But this year due to an IRA investment being liquidated, I was sent the full amount of my RMD without any withholding. This just happened this week.
Am I going to get any kind of penalty? Because I will owe taxes on this. Thanks very much
Michael
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-16 04:19
Any penalty you would owe depends on how much underwithheld you are on all your withholding and how much you paid in estimates, if any. Compare that total with your safe harbor amount (eg your tax liability for 2020). As for the liquidation, that will required a more detailed explanation for what happened.
Permalink Submitted by Michael Pressman on Thu, 2021-12-16 15:45
Thanks for your reply.I would owe about $7000 which is exactly the 20% (of the 35k distribution) federal I wanted withheld from this RMD . And that 7k would be very close to my total underpayment for 2021. The liquidation was just a normal distribution from my IRA. It’s just that the company failed to do the withholding.So is this distribution essentially the same as if I had, say, a 35k 1099 sometime this year…subject to the same underpayment penalty? Thanks
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-16 17:07
Yes, the underpayment penalty is calculated in the same manner except that an IRA distribution is all taxed at the ordinary income rate, whereas a brokerage 1099 may include some income taxed at the lower LT CG rate, and therefore a smaller underpayment. But if you paid $x in taxes for 2020, and your tax bill for 2021 is 3000 higher, you will only be penalized on the 3000, even if you owe 7000. And of course, the underpayment interest rates are only 3%.
Permalink Submitted by David Mertz on Thu, 2021-12-16 20:25
Since the distribution occurred in Q4 and the amount they failed to withhold is just the amount needed to cover the additional tax liability resulting from the distribution (and not some other income that occurred in Q1-Q3), simply make an estimated tax payment of $7,000 by January 15 or file your tax return and pay the balance due by January 31. Either will avoid the tax penalty that might otherwise result from not having taxes withheld from the distribution.
Permalink Submitted by Alan - IRA critic on Thu, 2021-12-16 22:31
DMx – doesn’t that require filing the 2210 AI to show the IRA distribution as occurring in Q4?
Permalink Submitted by David Mertz on Fri, 2021-12-17 01:37
Yes, that would require annualizing income on Schedule AI of Form 2210 to show that there was no underpayment in Q1 through Q3 since the default treatment assumes that income is received uniformly throughout the year. Even if you don’t make a Q4 estimated tax payment you would need to prepare Schedule AI if you wanted to minimize the penalty. Preparing Schedule AI can be a lot of work, so one would want to consider whether any penalty savings is worth the effort.