SmartAsset and Yahoo Finance LLC may earn commission or revenue through links within the content below.
I’m in my first yr of required minimum distributions of $36,000, which is causing me to be taxed on my $33,000 in Social Security advantages. What’s an excellent strategy to cut back my RMDs below $25,000 so my Social Security advantages don’t turn into taxable? Would taking a lump sum from my pre-tax IRA and paying the taxes make sense to avoid the yearly taxable event with my Social Security advantages? Would gifting money to my children/grandchildren (thereby reducing the RMD base) have negative tax consequences for my children/grandchildren? Wouldn’t it have a positive tax profit for me?
– Laura
That is an incredible query Laura, and there are just a few strategies which may enable you to reduce the long-term tax bill in your Social Security advantages. Let’s first explore how Social Security income is taxed after which get into the choices available to you.
Whether your Social Security income is taxed, and the way much of it’s taxed, will depend on your tax filing status and your other income. Step one is determining your provisional or “combined income,” which is just the sum of the next three variables:
If you happen to’re single, you could be subject to the next tax thresholds:
In case your combined income is lower than $25,000, none of your Social Security advantages are taxed
In case your combined income is between $25,000 and $34,000, as much as 50% of your Social Security advantages are taxed
In case your combined income is larger than $34,000, as much as 85% of your Social Security advantages are taxed
If you happen to are married and file jointly, the next limits apply:
In case your combined income is lower than $32,000, none of your Social Security advantages are taxed
In case your combined income is between $32,000 and $44,000, as much as 50% of your Social Security advantages are taxed
In case your combined income is larger than $44,000, as much as 85% of your Social Security profit is taxed
Bear in mind that the 50% and 85% limits usually are not tax rates. They simply reflect the utmost portion of your Social Security advantages that could possibly be subject to tax. The taxable amount is then added to your other income and the regular income tax rates and brackets are applied. (A financial advisor may give you the option to enable you to plan for Social Security, and this free matching tool can enable you to find an advisor.)
In terms of your query about reducing your RMD so your advantages aren’t taxable, you’ll wish to concentrate to your overall marginal income tax rate and the points at which a greater percentage of your Social Security profit is taxed.
For instance, in case you can move yourself right into a situation where only 50% of your Social Security is taxed as a substitute of 85%, that could possibly be advantageous. The identical is true in case you move from 50% to 0%. If you happen to can’t move between those thresholds, there is probably not much so that you can do.
In your case, assuming that your RMDs are the one income you’ve gotten apart from Social Security, there are two major strategies that I might consider.
Let’s assume that you just’re already at or near the purpose where 85% of your Social Security advantages are being taxed. In that case, taking more out of your IRA this yr, as you suggested, could possibly be a helpful strategy. You’ll increase your current tax bill, but you might potentially reduce future RMDs to the purpose where only as much as 50% of your Social Security profit is taxed in future years.
One technique to do that will be to withdraw extra cash and use it for whatever you’d like. Perhaps there’s a house project that you just’d prefer to tackle, or possibly, as you suggested, you’d like to provide money to your kids or grandchildren. You wouldn’t get a tax break for the gift, but they wouldn’t face any negative tax consequences either. Just keep the annual gift tax exclusion ($18,000 in 2024) in mind, in addition to the lifetime exemption limit ($13.61 million in 2024).
An alternative choice, and potentially essentially the most tax-efficient route, is to convert a few of that traditional IRA money to a Roth IRA. The conversion amount would still be taxable as income, however it would scale back future RMDs and get the cash right into a Roth, where it could grow tax-free and now not be subject to RMDs.
Any of those strategies would require an in depth eye in your total taxable income and the way it affects your marginal tax rate. If you happen to can do that in a way that reduces the longer term taxability of your Social Security advantages without pushing you into higher tax brackets now, you might definitely save yourself some money over the long run. (But in case you need additional guidance regarding this strategy, a financial advisor may give you the option to assist.)
An alternative choice with the potential for a more immediate profit is to make what’s called a qualified charitable distribution (QCD). That is once you contribute money to an eligible charity directly from an IRA. The charitable contributions each satisfy your RMD requirement and reduce your taxable income, which would scale back the quantity of your Social Security profit that gets taxed.
That is an excellent strategy to think about in case you don’t need the cash and there’s a number of charities that you should support. Nevertheless, while it should reduce your tax bill, it should still leave you with less money overall than simply paying the taxes you’ll otherwise owe. (And in case you need assistance with tax planning and strategic giving, consider working with a financial advisor.)
Lowering your combined income below certain thresholds can enable you to reduce or eliminate taxes in your Social Security advantages.
Taxes are at all times price considering as a part of your financial planning, but they’re just one a part of the larger picture. What matters most is that you’ve gotten the cash it’s good to support the life you should live.
The strategies above could support those personal goals by reducing your long-term tax bill, making it easier to pay for the belongings you care about. It’s also possible to take them too far, reducing your tax bill at the associated fee of not having the cash you would like once you need it. Keep this all mind as you concentrate on your options moving forward.
A financial advisor can enable you to plan for Social Security and integrate your advantages right into a retirement income plan. Finding a financial advisor doesn’t must be hard. SmartAsset’s free tool matches you with up to a few vetted financial advisors who serve your area, and you’ll be able to have a free introductory call together with your advisor matches to come to a decision which one you’re feeling is correct for you. If you happen to’re ready to search out an advisor who can enable you to achieve your financial goals, start now.
Understanding how your claiming age affects your Social Security advantages is important to creating an informed decision about when to start out collecting. Remember, waiting until age 70 will increase your advantages by as much as 32% while claiming as early as 62 will lead to as much as a 30% lifetime profit reduction. Nevertheless, the correct decision for chances are you’ll come right down to simply how long you expect to live.
Keep an emergency fund available in case you run into unexpected expenses. An emergency fund ought to be liquid — in an account that may not prone to significant fluctuation just like the stock market. The tradeoff is that the worth of liquid money might be eroded by inflation. But a high-interest account permits you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor trying to grow your online business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you’ll be able to spend more time making conversions. Learn more about SmartAsset AMP.
Matt Becker, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got an issue you’d like answered? Email AskAnAdvisor@smartasset.com and your query could also be answered in a future column.
Please note that Matt just isn’t a participant within the SmartAsset AMP platform, neither is he an worker of SmartAsset, and he has been compensated for this text.
