Required minimum distributions, or “RMDs,” and Social Security are often planned separately, but both can affect your retirement income and tax picture. Coordinating them can help you understand how much income may come from each source and how your decisions in one year could affect later years.
By Jeff Herman
Having this conversation now, in October, can save you a headache when you begin thinking about taxes next year.
Why?
Traditional IRA and 401(k) withdrawals are generally included in taxable income. Social Security benefits may also be partly taxable depending on your combined income and filing status. That means the timing and amount of withdrawals can matter—not only for meeting an RMD, but for managing total income.
For someone retiring before RMDs begin, the years between retirement and age 73 may offer opportunities to evaluate withdrawals, Social Security timing and other tax-planning strategies. But a withdrawal that appears helpful in one year could affect taxes or benefit taxation, so it should be evaluated in the context of the full plan.
Here’s the challenge. Many retirees don’t create a regular income plan from their retirement savings. In a recent survey of Vanguard clients, 39% of retirees with less than $1 million in retirement savings said they wait until required minimum distributions begin and then withdraw only the required amount.
Among those retirees, 44% said they misunderstand the RMD rules. The finding raises an important planning question: Are your withdrawals guided by the income you need, or simply by the minimum the rules require?
A strong market year can affect future RMD planning. Your RMD is generally based on your account balance on the previous December 31, so 2026 investment growth that remains in an eligible account at year-end may contribute to a larger RMD in 2027.
That withdrawal can add to taxable income; depending on your overall income, it may also affect how much of your Social Security is taxable or your Medicare premiums. Reviewing the full picture can help you understand the potential impact before you decide to withdraw.
A coordinated review will consider:
- Current and future spending needs
- Social Security claiming options
- Required distributions and deadlines
- Taxable income and tax brackets
- Investment risk and available cash
- A spouse’s income and survivor needs
- How long the plan may need to support you
This isn’t an exercise that you will perform every year. It’s a plan that can adapt to market performance, changing expenses, taxes, and longevity.
My goal is to help our clients understand how these decisions fit together, so they can move forward with greater confidence in the plan.