When I sit down with clients, two of the most common questions I hear are: “When should I take Social Security?” and “How do I handle my RMDs without paying unnecessary taxes or penalties?” These aren’t just small details—they’re decisions that can significantly impact your retirement income and your long-term financial health.
After nearly three decades as a financial advisor in San Diego, I’ve seen people lose money they didn’t have to simply because they didn’t fully understand the rules. Today, let’s break down the essentials of Required Minimum Distributions (RMDs) and Social Security so you can make confident, informed choices.
What Are Required Minimum Distributions (RMDs)?
RMDs are the minimum amounts you must withdraw from certain retirement accounts each year once you reach a specific age.
Current RMD Rules
- Age Requirement: As of 2023, you must begin RMDs at age 73. (This will rise to 75 in 2033.)
- Accounts Affected: Traditional IRAs, 401(k)s, 403(b)s, and other tax-deferred retirement accounts. Roth IRAs are not subject to RMDs during the original owner’s lifetime.
- Calculation: The IRS provides life expectancy tables to determine your required withdrawal based on your account balance and age.
Penalties for Missing an RMD
Failing to take your RMD used to result in a 50% penalty on the amount not withdrawn. Now, under updated rules, the penalty is 25%—still significant, and it can be reduced to 10% if corrected promptly.
Understanding Social Security Benefits
Social Security is often the foundation of retirement income, but how and when you claim it affects the size of your benefit.
Claiming Age Options
- Early Claiming (Age 62): You’ll receive a reduced monthly benefit—up to 30% less than your full retirement age benefit.
- Full Retirement Age (FRA): This varies between 66 and 67 depending on your birth year.
- Delayed Claiming (Up to Age 70): For each year you delay past FRA, your benefit increases by about 8% annually.
Taxation of Benefits
Up to 85% of your Social Security benefits may be taxable, depending on your combined income (which includes half your Social Security benefits plus other income sources).
The Intersection of RMDs and Social Security
Here’s where it gets tricky: RMDs and Social Security benefits often overlap, and the way you manage them can either increase your tax burden or save you money.
The Tax Trap
RMD withdrawals increase your taxable income. Higher income can cause more of your Social Security benefits to become taxable, creating a double impact.
Example Scenario
Imagine you’re 73, taking both RMDs and Social Security. If your RMDs push your income above certain thresholds, not only do you pay taxes on the withdrawals, but more of your Social Security benefit also becomes taxable.
Strategies to Optimize Your Benefits
The good news is, with proper planning, you can reduce taxes and maximize income.
1. Consider Roth Conversions Before RMD Age
By converting some of your traditional IRA or 401(k) funds to a Roth IRA in your 60s, you lower your future RMD amounts and create tax-free income sources.
2. Delay Social Security if Possible
If you can afford to wait, delaying Social Security until age 70 maximizes your monthly benefit and may help balance income streams once RMDs begin.
3. Coordinate Withdrawals
Instead of ignoring your accounts until RMD age, consider strategically withdrawing earlier in retirement when your tax bracket may be lower. This smooths out taxable income over time.
4. Plan for Charitable Giving with QCDs
If you’re charitably inclined, Qualified Charitable Distributions (QCDs) allow you to donate directly from your IRA once you’re 70½. These donations count toward your RMD but aren’t included in taxable income.
5. Work with a Professional
The interaction of taxes, RMDs, and Social Security can be complex. A fiduciary adviser can model scenarios to help you decide the best timing and strategy for your unique situation.
Avoiding Common Mistakes
- Forgetting the First RMD: Your first RMD is due by April 1 of the year after you turn 73. Missing it could force you to take two RMDs in one year, bumping you into a higher tax bracket.
- Claiming Social Security Too Early: Many people file at 62 because they worry it won’t be there. But in most cases, waiting—even a few years—pays off significantly.
- Not Considering Spousal Benefits: Married couples often overlook spousal and survivor benefits that could enhance long-term income security.
FAQs1. When do I need to start taking RMDs?
Currently, at age 73. The age will increase to 75 in 2033.
2. Can Roth IRAs help me avoid RMDs?
Yes. Roth IRAs are not subject to RMDs during your lifetime, which is why Roth conversions can be a powerful strategy.
3. Should I take Social Security before starting RMDs?
It depends on your health, financial situation, and other income sources. Often, delaying Social Security can maximize lifetime benefits.
4. What happens if I miss an RMD?
You may face a 25% penalty on the amount not withdrawn, reduced to 10% if corrected promptly.
5. How can I lower taxes on Social Security benefits?
Managing your other income sources—especially RMDs—strategically can help reduce how much of your Social Security is taxable.
Take Control of Your Retirement Income
Your retirement plan shouldn’t be left to chance or guesswork. Understanding how RMDs and Social Security work—and how they interact—is key to keeping more of your hard-earned money.
With the right strategy, you can avoid unnecessary penalties, minimize taxes, and maximize income. Remember: retirement income isn’t just about what you earn—it’s about what you keep.
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Investment advice offered through Copia Wealth Management Advisors, Inc.
Copia Wealth Management Advisors, Inc. is a registered investment advisor.
