With $218k in My IRA at 67, Should I Start Withdrawals to Avoid Bigger RMDs?

By Investor Empires On Oct 26, 2024

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I will be 68 soon and plan to wait until I can claim Social Security at 70 to get the maximum monthly benefit. I also plan to retire at the end of the year, if not sooner (i.e. in three months or less). Does withdrawing from my Traditional IRA (current balance is $215,000) to reduce income tax on my RMDs outweigh the benefit of keeping those withdrawals invested and growing tax deferred? My understanding is that if I withdraw amounts up to my standard deduction, those amounts will be tax-free.

-Austin

Retirement withdrawals, Social Security benefits, required minimum distributions (RMDs), taxes… there are a lot of moving parts when it comes to making decisions about your retirement income. Reducing the amount of money that is subject to RMDs can help reduce taxes once they take effect. This may also help you avoid taxes on your Social Security benefits.

If you don’t need the money now, but want to reduce your RMDs later, one of the best moves may be to convert a portion of your IRA to a Roth IRA each year. This can help reduce required withdrawals in the future and allow your money to grow tax-free, although there may be tax consequences on certain withdrawals. (A Financial advisor It can help guide you through the Roth conversion process and potentially avoid unwanted tax consequences.)

Delaying Social Security benefits until age 70 makes sense for some people. That’s when you can get the largest monthly payment possible. You can start collecting Social Security retirement benefits at age 62, but the monthly amount will be reduced by 30%.

For example, if your full retirement benefit is $2,000, your payment at age 62 will be only $1,400. However, waiting until age 70 will give you a maximum monthly benefit of $2,480.

However, there are some circumstances where starting early may be more beneficial, such as:

• You need money to cover your expenses
• You are in poor health or have a shorter life expectancy
• You are completely done with work
• Your spouse earns a higher income and will delay receiving their benefits

Remember, there is no one-size-fits-all answer, and you should do what makes the most sense for your family. (And if you need help planning for Social Security, Consider working with a financial advisor.)

Required minimum distributions (RMDs) trigger income taxes and can push you into a higher tax bracket.

Once you reach age 73, you must begin taking required minimum distributions — known as “RMDs” — from all traditional retirement accounts, including IRAs and 401(k) accounts. Your RMD is calculated based on your age, life expectancy, and account balance according to the IRS Uniform Lifetime Table. If you have multiple IRA accounts, you’ll need to know the RMDs for each individually.

What happens if you don’t take an RMD? The IRS charges you a penalty tax of 50% of the amount you were supposed to take. If you correct it and take an RMD within two years, your tax rate can drop to 25% or 10% depending on the circumstances. (If you need help calculating RMDs, Consider matching with a financial advisor.)

Any time you withdraw money from a pre-tax retirement account such as a traditional IRA, you will pay income taxes on that withdrawal at your tax rate. Once you are over the age of 59.5, you will no longer develop… 10% early withdrawal penaltyBut the money will become part of your taxable income.

In theory, if your total taxable income, including IRA withdrawals, does not exceed your income Standard discountYou will not owe income taxes. The actual answer depends on your complete tax situation, which may change from year to year.

There are some things you can do now to reduce future RMDs and future tax bills.

One option is to make withdrawals from your IRA now to lower the balance and reduce future RMDs. This can also make it easier to wait until age 70 to start receiving Social Security, maximizing those benefits. On the downside, you’ll lose out on additional tax-deferred growth in your IRA and have a smaller nest egg to withdraw later.

You can also convert some or all of your IRA to a Roth IRA. You’ll pay taxes on the transferred amount, just as you would if you withdrew the money. But your money will continue to grow tax-free in the Roth account, which is not subject to RMDs. For an added bonus, Roth withdrawals will not count as taxable income and therefore will not affect the taxes on your Social Security benefits. One caveat: Roth IRA conversions come with a strict five-year rule. To maintain full tax-exempt status, you generally cannot make withdrawals for at least five years from the time of conversion.

Finally, if you don’t need the money from your IRA, you can directly donate your RMD to a qualified charity — a strategy called Qualified charitable distributions (QCDs). This direct donation completely exceeds your taxable income. If you’re going to make a donation, this is the way to do it. (If you have further questions about your future tax obligations, Consider speaking with a financial advisor.)

A man calculates the amount of his RMDs for the current tax year.

There are things you can do now to reduce future risk management, but each strategy will have a different impact on your overall financial picture. You might consider making withdrawals from your IRA, converting your IRA to a Roth account or even donating your RMD to charity, eliminating your tax bill on the money in the process. Just keep in mind that the option you choose may affect the taxes on your Social Security benefits.

A Financial advisor It can help you plan for RMDs and make other important retirement decisions. Finding a financial advisor is not difficult. SmartAsset Free tool Matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to determine which advisor is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, Start now.
Think about a few advisors before you settle on one. It’s important to make sure you find someone you trust to manage your money. When you consider your options, These are the questions you should ask your advisor To ensure you make the right decision.
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Keep an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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Michelle Kagan, CPAis SmartAsset’s financial planning columnist and answers reader questions on personal finance and tax topics. Do you have a question you want answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Michelle is not a participant in the SmartAsset AMP platform, nor is she an employee of SmartAsset, and was compensated for this article.

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