Why a $30,000 RMD Can Make 85% of Your Social Security Check Taxable
A required minimum distribution from your traditional IRA or 401(k) can quietly trigger federal taxes on your Social Security benefits in ways most retirees never see coming until it is too late to plan around them.
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There’s a reason some people specifically opt to save for retirement in a Roth IRA despite not getting an up-front tax break on their contributions. Roth IRAs do not force savers to take required minimum distributions, or RMDs, in retirement.
By contrast, if you have money in a traditional IRA or 401(k) plan, RMDs will kick in once you turn 73 or 75, depending on your year of birth. And those RMDs could do more than just drive up your federal tax bill. They could also cause up to 85% of your Social Security benefits to be taxable.
How taxes on Social Security benefits work
Social Security benefits are subject to federal taxes based on a formula called provisional income. Provisional income is calculated as the sum of your adjusted gross, tax-exempt interest income, and 50% of your annual Social Security checks.
If you’re single, a provisional income of over $34,000 means up to 85% of your Social Security benefits could be subject to federal taxes. If you’re married filing jointly, the same thing happens when your provisional income exceeds $44,000.
The reason these thresholds are so low is that they were established by Congress decades ago and have not gotten an adjustment for inflation.
How RMDs could trigger Social Security taxes
If you’re wondering what the connection is between RMDs and taxes on Social Security benefits, it’s simple.
RMDs count as part of your adjusted gross income. As such, they’re part of the provisional income formula. And the larger they are, the more likely you are to find yourself paying taxes on your Social Security checks.
Let’s say you’re single and your only income outside of your RMDs is a $2,500 monthly Social Security benefit. That means your annual Social Security income is $30,000, and the amount that counts toward provisional income is $15,000.
Now, let’s assume you need another $8,000 from savings to cover your remaining bills. If you were to take that withdrawal from a traditional IRA or 401(k), your provisional income would land at $23,000, which is low enough to avoid having your benefits taxed at all.
But let’s say you have to withdraw $30,000 from your retirement savings to satisfy your RMD. At that point, your provisional income is $45,000, which is enough to make 85% of your Social Security benefits taxable.
How to avoid taxes on Social Security
If you don’t like the idea of having to pay taxes on your Social Security benefits, your best bet is to keep your retirement savings in a Roth account from the start — either an IRA or 401(k).
Roth accounts don’t have RMDs. And even if they did, Roth account withdrawals are tax-free and therefore don’t go into adjusted gross income or the provisional income formula.
If you’re already collecting Social Security and have RMDs looming, you still have options. A Roth conversion could help you avoid having benefits taxed in the future.
But Roth conversions are a taxable event, which means you could end up with a large tax bill the year you move your money over. However, it may be worth paying that tax and having your Social Security benefits taxed for a year or two if it gets you out of RMDs and future taxes and results in more financial flexibility.
It’s wise to consult with a tax professional or financial planner if you’re looking to do a Roth conversion. Moving a large sum of money out of a traditional retirement account could have other consequences, like triggering Medicare premium surcharges. So it’s best to work with someone who can help you mitigate those repercussions.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
