How to Coordinate Social Security, RMDs, and Roth Conversions in Retirement

One of the cold, hard truths about planning your finances in retirement is that the further ahead you plan, the easier it becomes. That's true when it comes to saving for retirement as well as for planning how to tap into your savings when you're in your 60s, 70s, and beyond.

Retirees and soon-to-be-retirees who plan ahead can enjoy more of their hard work and savings in retirement while giving less money to the government via taxes, but it requires coordinating a lot of different factors. Most notably, retirees have to consider how to balance required minimum distributions (RMDs), Roth conversions, and Social Security.

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The big balancing act

To understand the value of coordinating all three factors, it's important to understand how each source of income is taxed.

• Roth conversions are taxed as ordinary income at the time you make the conversion. Savings continue to grow tax-free, and withdrawals from a Roth IRA are tax-free once you're 59 1/2.
• RMDs start at age 73 or 75, depending on when you were born, and are taxed as ordinary income. The withdrawal amount is based on the balance of your retirement account at the end of the prior year and your age.
• A portion of your Social Security benefits becomes taxable if your total income exceeds certain thresholds.

Each action impacts the other. Roth conversions will lower your future RMDs, but they could also push some of your Social Security income into taxable territory. RMDs will likely increase the percentage of Social Security subject to income tax as well. And collecting Social Security makes it harder to make Roth conversions in a tax-efficient manner.

As a result, the best way to coordinate all three looks something like this:

When you retire, take several years to make strategic Roth conversions before starting Social Security. If you can live off savings in your taxable brokerage account while making Roth conversions, you can fill up the lower tax brackets with conversions and limit how much tax you'll pay.

Delaying Social Security as long as possible will allow you to maximize your tax efficiency while likely increasing the lifetime value of your benefits in most cases. As such, delaying until 67 or 70, depending on your circumstances, is likely your best option. There's no value in delaying benefits beyond age 70, even if you have to pay higher taxes.

With good planning, your RMDs, starting in your mid-70s, will have a limited impact on your tax liabilities. You can withdraw tax-free from your Roth account without impacting the taxability of your Social Security benefits. And if your RMD is higher than you would like, you could consider a qualified charitable distribution as one of the most tax-efficient ways to give to charity while also reducing your RMD requirement.

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