It’s been a month since Tax Day, and I’m still thinking about taxes.
While some taxpayers may have received tax refunds with the filing of their returns, many others may have had to stroke one check to pay tax liability—and another for estimated taxes.
With both federal tax liabilities and the first quarter estimated tax payments due April 15 each year, taxpayers barely have time to catch a breath before making second quarter payments just 60 days later on June 15.
This blog post will review potential strategies to minimize or alleviate the need to pay estimated taxes using Required Minimum Distributions in coordination with Qualified Charitable Distributions.
Please keep in mind that these strategies may not be appropriate for everyone. Prior to making any changes to your own tax planning, we recommend that you discuss your individual circumstances with your CPA as well as your Portfolio Manager at FBB Capital Partners.
Using RMDs to Satisfy Estimated Tax Payments
By the time you celebrate your 70th birthday, there are few age-based milestones remaining. From a financial planning perspective, there is one more important birthday: Retirees ages 73 and above (75 for those born 1960 and later) are required to begin taking distributions from retirement accounts. These distributions are also referred to as Required Minimum Distributions or RMDs.
Required Minimum Distributions are required regardless of whether one wants or needs the funds for lifestyle spending, and they are taxed as ordinary income in the year in which they are taken. The required amount grows larger with each passing birthday. This may compound a retiree’s expenses as the additional taxable income resulting from RMDs may trigger higher Medicare premiums, higher taxes, and other downstream tax calculations tied to Adjusted Gross Income (AGI) thresholds.
If you are subject to paying estimated taxes, you might consider using RMDs to help meet your tax payment obligations in lieu of making quarterly estimated payments. This strategy may help simplify cash flow, reduce administrative friction, and potentially minimize underpayment exposure.
Unlike quarterly estimated tax payments, which are credited when the tax payments are paid, taxes withheld from IRA distributions are generally treated as though they were paid evenly throughout the year — regardless of when the withholding occurs. This may create a meaningful and often overlooked planning opportunity for taxpayers.
As taxpayers approach year-end, quarterly estimated payments made earlier in the year may no longer align with final tax liability projections. This strategy may be helpful in some of the following circumstances:
- Those with complex income streams or liquidity events resulting from private equity distributions, concentrated stock sales, K-1 income, or deferred compensation.
- Taxpayers facing underpayment penalties.
- Taxpayers utilizing a ROTH conversion strategy.
- Taxpayers facing capital gains distributions, higher than anticipated capital gains, or an unexpected windfall.
Rather than sourcing liquidity from taxable portfolios, clients may be able to increase withholding or even allocate the entire Required Minimum Distribution to pay both federal and state income taxes. Alternatively, cash may need to be generated from the sale of appreciated securities within a brokerage account, which would trigger additional taxes. Again, speak with your FBB Capital Partners Portfolio Manager and your tax preparer to confirm whether this strategy is right for you.
Integrating Qualified Charitable Distributions (QCDs)
Qualified Charitable Distributions (QCDs) may present an important companion strategy to the above. It used to be that retirees would begin taking RMDs at age 70½. That changed under the SECURE 2.0 Act, which called for increasing the age for RMDs to 73 years old (RMD age will shift again to 75 years old beginning in 2033). However, the legislation retained the minimum age for eligibility to make Qualified Charitable Distributions.
Strategic planning may help to transform RMDs from a tax burden into a meaningful philanthropic and cash flow tool. For charitably inclined individuals ages 70½ and above,
Taxpayers may fulfill RMDs from IRAs by making direct transfers from their IRA accounts to charity (up to $111,000 in 2026). The “QCD” is not tax deductible. However, if executed properly, the distribution may be excluded as ordinary income and will also meet a taxpayers Required Minimum Distribution.
For those ages 73 and above who are subject to RMDs, using QCDs to make charitable contributions may lower downstream tax calculations tied to Adjusted Gross Income (AGI) thresholds. For high-income retirees, that AGI reduction may be more valuable than a standard charitable deduction.
Final Thoughts
For wealthy retirees, RMDs may be unavoidable. However, when coordinated thoughtfully, RMDs may offer an opportunity to more efficiently manage estimated tax obligations and charitable giving, improving cash flow flexibility, and reducing administrative burden.
About the Author: Jane Delashmutt O’Mara, CFP®
Jane brings more than a decade of experience working in financial services to her practice. Her financial planning advice has been featured in various radio and news outlets including Marketplace, CNBC, The Street, Market Watch, USA Today, and U.S. News & World Report. Jane is a Certified Financial Planner® practitioner and is a member of the National Association of Personal Financial Advisors. Jane believes that client education and compassion are vital to the financial planning process. Whether she’s working with a client to plan for retirement or navigate a major milestone such as marriage, divorce, or loss of a loved one, she enjoys educating and empowering her clients. Jane also enjoys working with families with unique or complex estate planning needs. Prior to joining FBB Capital Partners, Jane held various roles in commercial real estate finance, banking, and brokerage industries. Jane is a graduate of St. Mary’s College of Maryland and holds a master’s degree from New York University where she studied community development and real estate finance. As an undergraduate, Jane was an All-American sailor, helping her team to several national titles. Jane and her husband GK live in Oxford, Maryland with their two children.
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