Taking IRA Withdrawals Before RMDs? These ETFs Can Help Keep Your Benefits Tax-Light
Before required minimum distributions kick in, retirees have a rare window to control exactly how much income lands on their tax return and how much of their Social Security gets taxed. One popular fund that looks like a solution actually…
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You’re retired, collecting Social Security, and taking out money from a traditional IRA before required minimum distributions begin. Those withdrawals are optional, so you decide how much income lands on your return each year. That control matters, because the more income you report, the more of your benefit can become taxable. Three funds often come up when retirees talk about this problem: iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT), Vanguard Growth ETF (NYSEARCA:VUG), and Vanguard Tax-Exempt Bond ETF (NYSEARCA:VTEB). ITOT and VUG can help a little. VTEB is widely misunderstood, and knowing why can save you a surprise at tax time.
How IRA Withdrawals Pull Social Security Into Taxable Income
The IRS starts with a combined figure: one-half of your benefits plus all your other income, including tax-exempt interest. If that total tops your base amount, part of your benefits may be taxable. According to IRS Publication 915, once the combined figure passes $34,000 for most filers, or $44,000 for married couples filing jointly, up to 85% of your benefits can count as taxable income.
What You Can Actually Control
Your IRA withdrawal is the main driver, and no fund changes that. What you can manage is how much you take out in a given year and whether your taxable brokerage account adds more income on top. Growth you haven’t sold doesn’t count until you sell. Dividends and interest count when they’re paid. So in a taxable account, funds that deliver most of their return through price growth add less to your combined figure.
ITOT: Whole-Market Exposure With Modest Income
ITOT tracks the S&P Total Market Index, which covers U.S. common stocks listed on major exchanges. Its expense ratio is 0.03%, so costs barely register.
Most of its return has come from price growth. The fund’s share price rose about 300% over the past 10 years, while its trailing 12-month distributions of $1.69 per share work out to a yield of roughly 1.0% at the current price. It still pays quarterly, and those dividends count toward your combined figure.
VUG: Big Growth Companies, Smaller Payouts
VUG tracks the CRSP US Large Cap Growth Index and charges 0.03%, about 30 cents a year per $1,000 invested. Growth companies tend to reinvest earnings rather than pay them out, so distributions run smaller still. The latest quarterly payout was $0.091 per share, which annualizes to $0.364 and a yield of about 0.41%.
That low payout comes with real concentration. Technology makes up 65.9% of the fund, and its top four holdings account for 44.6% of assets. Over the past month, VUG fell 3.21% while ITOT slipped 1.08%. A small dividend doesn’t make a fund safer, and the dividends VUG does pay still count.
VTEB: Why Municipal Bonds Don’t Solve This Problem
VTEB holds investment-grade U.S. municipal bonds. Its interest is generally excluded from ordinary taxable income, and it pays monthly. Trailing 12-month distributions of $1.6979 per share equal a yield of about 3.5%.
Here’s the catch many retirees miss. The IRS adds tax-exempt interest back in when it figures how much of your Social Security is taxable. VTEB can lower your ordinary income tax, but its interest still counts toward the combined figure that decides whether your benefits get taxed. Bond funds can also lose value: VTEB’s price is down 0.98% over the past year.
Trade-Offs to Weigh Before You Rebalance
To answer the headline directly: ITOT and VUG can help keep your benefits tax-light by adding less current income, though they still add some. VTEB doesn’t help with this particular effect. Deferred gains also catch up with you eventually, since selling shares to raise cash creates taxable gains that count in the year you sell. And VUG’s tilt toward a few big tech names means bigger swings than the broad market.
The most useful habit has nothing to do with which fund you own. Each year, add up your expected income from every source before you decide how much to take from your IRA. The withdrawal is the tool you control. Low-payout funds like ITOT and VUG can keep your taxable account from working against you while you use it.
Those pre-RMD years are also the cheapest window most retirees ever get for Roth conversions, and we laid out how to size them up in a free guide to the Roth window.
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Ryne Mauck is an investment writer covering exchange-traded funds, retirement planning, and portfolio strategy. Through his work at 24/7 Wall St. and other investment platforms, including Seeking Alpha, he aims to provide clear, research-driven insights that help investors make more informed decisions while maintaining a long-term approach to investing.
Ryne holds a B.Sc. in Finance and an M.A. in Political Science. He is a formerly registered Municipal Advisor Representative and has passed the Series 50, Series 63, and Series 65 exams. His articles are not intended to be, nor should they be interpreted as, financial advice.
