Your First RMD at 73 Can Push 85% of Your Social Security Into Taxable Income
Required minimum distributions come with a tax consequence most retirees never see coming, and it has nothing to do with the withdrawals themselves. The real damage shows up in your Social Security check.
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There’s a reason traditional retirement accounts like IRAs and 401(k)s appeal to so many people. These accounts offer you a tax break on the money you contribute to your retirement savings.
The problem tends to arise later, once you start having to take required minimum distributions, or RMDs. If you were born prior to 1960, RMDs begin at age 73. And those forced withdrawals can create a tax liability for you year after year.
That’s not the only problem with RMDs, though. Depending on your total financial picture, your RMDs could make up to 85% of your Social Security benefits taxable if those mandatory withdrawals are large enough.
How your income impacts the taxation of your Social Security benefits
Some seniors do not have to pay taxes on their Social Security benefits. Whether you have to or not depends on what your provisional income amounts to.
Provisional income is calculated as the sum of your adjusted gross income, tax-exempt interest income you receive (such as municipal bond interest), and 50% of your annual Social Security benefits.
If your provisional income exceeds $34,000 as a single tax-filer, you could be taxed on up to 85% of your Social Security benefits. And if your provisional income exceeds $44,000 as a married couple filing jointly, the same holds true — you could be taxed on up to 85% of your Social Security.
If you’re thinking that these income thresholds sound very low, you wouldn’t be wrong. They were established decades ago and have not gotten an adjustment for inflation.
But here’s where RMDs fit in. Even if you don’t need to tap your traditional retirement account for money, once you’re on the hook for RMDs, you have to take them every year or otherwise face a 25% penalty.
But once those RMDs come out, they’re added to your provisional income. That could easily push you to the point where your Social Security checks become taxable.
The right retirement account makes a difference
If you don’t like the idea of owing taxes on your Social Security, you should know that not all retirement accounts require RMDs. Roth IRAs don’t. And if you have your money in a Roth IRA, you can potentially keep your provisional income low enough where your Social Security is exempt from taxes.
In fact, the nice thing about Roth IRAs is that withdrawals are tax-free. That means those withdrawals also don’t count toward your provisional income.
So let’s say you want to tap your savings to supplement your Social Security benefits, even if you’re not forced to take RMDs. You can take $80,000 a year out of a Roth IRA, and that $80,000 will not get added to your provisional income.
If you’re nearing retirement with a sizable balance in a traditional retirement account, you can try to do a Roth conversion before RMDs begin. This allows you to transfer your savings into a Roth IRA.
Even if you can’t manage a complete Roth conversion, moving some of your savings into a Roth IRA could keep your RMDs lower. And if those mandatory withdrawals aren’t too high, it might spare you from owing taxes on your Social Security benefits.
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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, The Washington Post, 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.
