Accounting
Financial advisors are torn over this RMD tax strategy
Required minimum distributions can be a touchy subject for retirees and their financial advisors, requiring them to liquidate assets that they may prefer to keep in the market. Frustration around RMDs is often compounded by the tax consequences they present, but advisors say one little-known strategy could help ease the burden — especially as investors wait for stocks to fully recover from a tariff-driven downturn.
The strategy hinges on the unique flexibility of tax withholdings on
The idea of withholding income taxes from a retirement account distribution isn’t new. Retirees often withhold a set percentage, say 20%, of a distribution for taxes. For example, a retiree can say, “Distribute $20,000 from my IRA, withhold 20% for taxes and send the net $16,000 to me.” But what many advisors miss is the ability to delay tax payments until the end of the year, according to Keith Fenstad, vice president and director of wealth planning at Tanglewood Total Wealth Management in Houston, Texas.
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Through this strategy, retirees can take smaller monthly or quarterly distributions without any tax withholding and then make a much larger tax withholding on a distribution toward the end of the year. Thanks to flexible RMD tax payment rules, end-of-year tax withholdings can cover distributions that were made much earlier in the same year.
“Even if that request is made in December, the $4,000 of taxes withheld is spread across the previous quarterly tax payment periods,” Fenstad said.
Kicking the tax can down the road
Delaying tax payments on RMDs can offer a few key advantages, according to Fenstad. For some clients who simply don’t want the headache of making multiple tax payments throughout the year, delaying tax withholdings on RMDs can simplify the process.
“We have clients who might withhold 60%, 70% of their RMD just to cover all their taxes,” Fenstad said. That way, “They don’t have to fool with quarterly estimates.”
This approach can also help address a potential underpayment penalty resulting from a previously missed estimated tax payment, he said. Delaying tax withholdings on RMDs could be an especially useful strategy for certain clients who expect their investments to continue to recover from
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Mark Stancato, founder and lead advisor at VIP Wealth Advisors in Decatur, Georgia, described the strategy as a “calculated risk.”
“Delaying the timing of an RMD until later in the year can be an effective way to improve tax efficiency during a market downturn — but the details matter. The key question to ask is where the tax payment is coming from,” he said. “If taxes are withheld directly from the RMD distribution, delaying until year-end may reduce the number of shares that need to be sold — especially if the market recovers. That can help clients avoid locking in unnecessary losses. But if the market declines further, they could end up selling even more at lower prices.”
Other advisors say that delaying tax withholdings can be a helpful strategy regardless of how the market is performing.
“Waiting to sell shares to pay the tax because of a belief that the market will rise is a market timing decision,” said Sammy Grant, principal at Homrich Berg in Sandy Springs, Georgia. “But even if a client or advisor believes the market will experience further declines, waiting to pay the tax due on early-year distributions until year-end is a wise decision. This more pessimistic client can liquidate enough to pay the tax today while leaving the proceeds in a money market inside the IRA, earning 4%-plus for the remainder of the year.”
Not all advisors are on board
Tim Witham, founder of Balanced Life Planning in Villa Hills, Kentucky, said that delaying RMD tax withholdings is a common strategy among some advisors. However, he explained that this approach is often not ideal for many
“In a down market, rather than selling funds for IRA distributions, I have coached clients to push securities out of their IRAs in-kind to a brokerage account,” Witham said. “For example, if a small-cap fund in your IRA is down 20%, you can take that fund from an IRA to a brokerage account. … When the fund rebounds, it will do so outside of the IRA, where, if held over a year, the gain would be eligible for long-term capital gains treatment, rather than ordinary income that would occur as a result of an IRA distribution.”
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“This strategy puts control with the client and advisor in a down market, rather than hoping for a market rebound by year-end,” he added. “As we all know, hope is not a strategy.”
Other advisors say that navigating a down market through such strategies simply isn’t necessary if a client is
“We advise our clients who have reached the magical age of required minimum distributions that there should be a minimum of five years’ worth of distributions invested in liquid high-quality short-term fixed income,” said Michael DeMassa, founder of Forza Wealth in Sarasota, Florida. “In other terms, at least 20% of the IRA should be accessible for required minimum distributions and not subject to stock market volatility. During times of market stress, we can make distributions from the fixed income allocation and not be forced to sell equities at the wrong time.”
The House Ways and Means Committee held a hearing Tuesday to mark up the so-called “one, big beautiful bill” extending the expiring provisions of the Tax Cuts and Jobs Act while adding other tax breaks for tip income, overtime pay and Social Security income and eliminating tax credits from the Inflation Reduction Act for renewable energy as well as the Direct File and Free File programs.
“Today, this Committee will move forward on President Trump’s promise of delivering historic tax relief to working families, farmers and small businesses,” said committee chair Jason Smith, R-Missouri, in his opening statement. “The One Big Beautiful Bill is the key to making America great again. This moment has been years in the making. While Democrats were defending IRS audits on the middle class and tax carveouts for the wealthy, Republicans on this Committee got on the road, to hear from real Americans about how the 2017 tax cuts benefited them. This bill wasn’t drafted by special interests or K Street lobbyists. It was drafted by the American people in communities across the country.”
Democrats blasted the bill. “In 2017, Republicans passed a tax law that was supposed to pay for itself, raise wages, and help working families,” said ranking member Richard Neal, D-Massachusetts. “None of that happened. Instead, it exploded the deficit, worsened inequality, and left everyday Americans behind. Now they want to double down on the same failed playbook. One that rigs the system for billionaires and big corporations while everyone else pays the price.”
Among the provisions, the bill would make the expiring rate and bracket changes of the TCJA permanent and increase the inflation adjustment for all brackets excluding the 37% threshold, according to a
Other changes and limitations to itemized deductions would be made permanent, including the limitation on personal casualty losses and wagering losses and termination of miscellaneous itemized deductions, Pease limitation on itemized deductions, and certain moving expenses.
The bill is likely to go through some changes when it goes to the Senate. “Politically, we’ve been talking about the process for the last couple months,” said Mark Baran, managing director at CBIZ’s national tax office. “Congress is finally able to pass a concurrent resolution to unlock the budget reconciliation process.”
“The House and the Senate have completely different instructions on what they’re going to cut and how they’re going to score,” he added. “Some of that’s very controversial, and that needs to be worked out. But now we’re getting into the actual crafting of provisions and legislation.”
According to a
The bill would also allow businesses to include amortization and depreciation when figuring the business interest limitation through Dec. 31, 2029, while making permanent the excess business loss limitation.
In addition, the bill would retroactively terminate the Employee Retention Tax Credit for taxpayers who filed refund claims after Jan. 31, 2024.
In keeping with Trump campaign promises, the bill would eliminate taxes on tips for employees in certain defined industries where tipping has been a traditional form of compensation. There would be a new $4,000 deduction for seniors that phases out starting at $75,000 of income. The bill would also eliminate taxes on overtime pay.
The bill would give individuals an above-the-line deduction for interest on loans used to purchase American-made cars, but that would be capped at $10,000 with income phaseouts starting at $100,000 (single) and $200,000 (married filing jointly).
The bill would also increase taxes on certain private college investment income up to a maximum of 21% on universities with a student-adjusted endowment above $2 million.
It would also roll back some of the renewable energy provisions from the Inflation Reduction, including a phaseout and restrictions on clean energy facilities starting in 2029, while also limiting or eliminating clean housing energy and vehicle credits. The bill would sunset major IRA clean electricity tax credits, including the clean electricity production tax credit (45Y), clean electricity investment tax credit (48E), and nuclear electricity production tax credit (45U) begin phasing out after 2028 and finish phasing out by the end of 2031; repeal hydrogen production credit (45V) for facilities beginning construction after 2025, according to the Tax Foundation. It would also phase out advanced manufacturing production credit (45X) for wind energy components after 2027, for all other eligible components after 2031. Across several IRA clean energy credits, the bill would repeal transferability after the end of 2027 and further limit credits based on involvement of foreign entities of concern. On the other hand, it would expand the clean fuel production credit (45K), and tighten rules on the 126(m) limitation for executive compensation.
The bill would terminate the current Direct File program at the Internal Revenue Service and establish a public-private partnership between the IRS and private sector tax preparation services to offer free tax filing, replacing both the existing Direct File and Free File programs.
The Federal Accounting Standards Advisory Board is asking for input on emerging accounting issues and questions related to reporting entity reorganizations and abolishments as the federal government endures wide-ranging layoffs and reductions in force, including the elimination of entire agencies by the Elon Musk-led Department of Government Efficiency.
“Federal agencies and their functions, from time to time, have been reorganized and abolished,” said FASAB in its
Reorganization refers to a transfer, consolidation, coordination, authorization or abolition of one (or more) agency or agencies or a part of their functions. Abolition is a type of reorganization and refers to the whole or part of an agency that does not have, upon the effective date of the reorganization, any functions.
The Trump administration has recently moved to all but eliminate parts of the federal government such as the U.S. Agency for International Development and the Consumer Financial Protection Bureau, and earlier this month, Republicans on the House Financial Services Committee
FASAB issues federal financial accounting standards and provides timely guidance. Practitioner responses to the request for information will support its efforts to identify, research and respond to emerging accounting and reporting issues related to reorganization and abolishment activities, such as transfers of assets and liabilities among federal reporting entities. The input will be used to help inform any potential staff recommendations and alternatives for FASAB to consider regarding short- and long-term actions and updates to federal accounting standards and guidance in this area.
The questions include:
- Have any recent or ongoing reorganization activities or events affected the scope of functions, assets, liabilities, net position, revenues, and expenses assigned to your reporting entity (or, for auditors, your auditees)? If so, please describe.
- What accounting issues have you (or your auditees) encountered (or do you anticipate) in connection with recent or potential reorganization activities and events?
- Please describe the sources of standards and guidance that you (or your auditees) are applying to recent, ongoing, or pending reorganization activities and events.
- Have you experienced any difficulties or identified gaps in the accounting and disclosure standards for reorganization activities and events? What potential improvements would you recommend, if any?
FASAB is asking for responses by July 15, 2025, but acknowledged that late or follow-up submissions may be necessary given the provisional nature of the request. Responses should be emailed to [email protected] with “RERA RFI response” on the subject line.
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