The Sneaky Way Your RMDs Could Cost You Some of Your Social Security Benefits
Key Points
You must take RMDs from most tax-deferred retirement accounts beginning in the year you turn 73.
This could raise your adjusted gross income and put you at risk of owing Social Security benefit taxes.
You could owe ordinary income taxes on up to 85% of your benefits.
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For most people, the annual required minimum distributions (RMDs) that become mandatory at age 73 aren't a huge deal. They're already withdrawing money from their savings to cover their living costs, so they fulfill their RMDs without giving it much thought.
However, if you have a lot of savings, RMDs might force you to withdraw more money from your retirement accounts than you wanted to. This can lead to a higher tax bill and, surprisingly, fewer Social Security benefits, too.
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How RMDs could cost you Social Security benefits
You must take RMDs from your tax-deferred retirement accounts each year, unless you qualify for an exception, like skipping withdrawals from your current 401(k) if you're still employed and own less than 5% of the company. Tax-deferred withdrawals raise your adjusted gross income (AGI) for the year, and you'll pay ordinary income taxes on them.
For some seniors, this triggers a domino effect. A higher AGI raises your provisional income, which the government uses to determine whether you owe taxes on a portion of your Social Security checks. The following table breaks down what percentage of your benefits could be taxable based on your marital status and provisional income.
|
Marital Status |
0% of Benefits Taxable If Provisional Income Is Below: |
Up to 50% of Benefits Taxable If Provisional Income Is Between: |
Up to 85% of Benefits Taxable If Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Data source: Social Security Administration.
If your benefits fall within the taxable range, you could find yourself giving thousands more dollars back to the government. While it's not a direct cut to your checks, it still means you have less money available to cover your other living costs.
What to do if you think your RMDs might trigger Social Security benefit taxes
It's sometimes possible to avoid benefit taxes by keeping your taxable income sources to a minimum. Don't withdraw more from your tax-deferred retirement accounts than RMDs demand. Rely upon Roth savings if you have them to cover some of your expenses without triggering tax consequences.
If you can't avoid benefit taxes, you may need to set aside some of your RMDs to cover the extra tax liability. You can also request that the Social Security Administration withhold money from future checks to cover taxes. If it withholds too much, you'll get this extra back with your tax refund.
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