First read my post on the April 1st deadline for taking your first “required minimum distribution” (RMD) from your tax-deferred accounts like IRA’s and 401K’s.
Here is the tip for reducing a potential tax bite from your Social Security benefits.
First of all, a portion of your Social Security benefits may be taxable if your Adjusted Gross Income (the very last line on your 1040) excluding your Social Security benefits for the year plus
- Any tax-exempt interest you earned, plus
- 50% of your Social Security benefits.
Combine these and it becomes your “combined income”, if it is below $32,000 (married filing jointly), none of your Social Security benefits will be taxed.
- For every dollar of “combined income” above that level, $0.50 of benefits will become taxable until 50% of your benefits are taxed or until you reach $44,000 of combined income (married filing jointly).
- For every dollar of combined income above $44,000 (married filing jointly), $0.85 of Social Security benefits will become taxable — all the way up to the point at which 85% of your Social Security benefits are taxable.
So what is the tip and what does it have to do with your RMD? Simple, if you have a medium to larger amount of tax deferred investments in IRA’s and 401K’s don’t delay your first RMD to the following year. For example if you have $500,000 in tax deferred accounts your annual RMD might be $17,000, and if you have $50,000/yr Social Security benefits you’ll already be in the 50% bracket of Social Security being taxable. However if you take your first RMD in the following year you just moved some of your Social Security to the 85% bracket.
The best thing to do for many people is take your first RMD in the year you turn 70 ½, don’t wait till April 1st of the following year.