By Brent Matthew
If you have a tax-deferred retirement account like a traditional IRA or 401(k), you’ll have to start taking required minimum distributions (RMDs) when you turn a certain age. Your RMD is the minimum amount of money you’re required to withdraw from your account each year. Currently, you must start taking RMDs at age 73.
This may not seem like a significant issue. However, because your funds weren’t taxed going into your retirement account, they must be taxed going out. Without careful planning, required minimum distributions could leave you stuck with an unexpectedly high tax bill.
How Can Required Minimum Distributions Cost You More in Taxes?
From the outside, taking required minimum distributions might seem like withdrawing money from a bank account. However, RMDs have a far greater impact on taxes than most people realize. Here’s a look at how RMDs can lead to a much higher tax bill:
They’re Treated As Taxable Income
Your required minimum distributions are generally taxed like regular income in the year you take them. If the amount of your RMD is significant, it might push you into a higher tax bracket.
They Might Cause Your Social Security Benefits to Become Taxable
Depending on your income, a portion of your Social Security benefits may be taxable. When determining whether you may owe tax on your benefits, the IRS calculates something called your “combined income.” Your combined income includes the following:
- Your adjusted gross income (AGI)
- Half of your Social Security benefits
- Income from nontaxable interest
Once your combined income exceeds a certain threshold, some of your Social Security benefits become subject to tax. If your required minimum distributions increase your AGI significantly enough, you might find that you now owe tax on your benefits.
They Could Indirectly Trigger the Net Investment Income Tax (NIIT)
If you have income from investments and your modified adjusted gross income (MAGI) exceeds a set threshold, the net investment income tax (NIIT) may be triggered. If this happens, you’ll owe a 3.8% tax on your net investment income.
Required minimum distributions don’t directly trigger NIIT. However, if your RMDs push you over the MAGI threshold, you might unexpectedly owe tax on your investments.
Strategies for Keeping Your Tax Bill to a Minimum
Planning your required minimum distributions is part of a sound wealth management strategy. I work with each of my clients to build a customized approach to RMDs, but these tools and strategies often come into play:
Qualified Charitable Distributions (QCDs)
QCDs give you the opportunity to support a charity while avoiding the tax consequences of RMDs. This strategy allows you to transfer up to $108,000 from a traditional IRA to a charity of your choice. The donation is counted toward your RMD for the year.
Utilizing Tax-Loss Harvesting
Tax-loss harvesting involves selling some of your investments at a loss to offset taxable profits. With careful planning, you may be able to use tax-loss harvesting within separate taxable brokerage investment accounts to offset the taxable income from RMDs.
Avoid Taking Your First and Second RMD in the Same Year
Under RMD rules, you may delay taking your first RMD until April 1st of the following year (instead of doing so by December 31st as in all subsequent years). While the extended deadline is nice, most would want to avoid waiting until the following year, since you still need to take the second RMD too, and that would result in two RMDs in the same tax year, thereby increasing your chances of getting bumped into a higher tax bracket.
RMDs Don’t Have to Derail Your Financial Plan
The prospect of facing required minimum distributions can be daunting, but you don’t have to handle this significant change alone. I’ve helped countless clients find the financial confidence that only comes with having a sound, personalized plan—and I hope to be able to help you and your family, too.
If you want to learn more about what Scottsdale Wealth Advisory can do for you, please don’t hesitate to contact us.
To schedule your complimentary financial coaching session, call (480) 247-9090, email info@SWAFirm.com, or book directly at calendly.com/BrentMatthew.
Frequently Asked Questions About Required Minimum Distributions (RMDs)
1. How can required minimum distributions affect my tax bracket?
RMDs are treated as taxable income, and if the amount of your withdrawal is large, it could push you into a higher tax bracket. This means the more you withdraw, the more you could pay in taxes. Careful planning around your RMDs can help minimize this tax impact by managing the timing and amount of each distribution.
2. Can RMDs make my Social Security benefits taxable?
Yes, RMDs can cause a portion of your Social Security benefits to become taxable, or more so. When your total income exceeds a certain threshold, the IRS calculates your “combined income,” which includes RMDs. If this combined income is high enough, it could make a portion of your Social Security benefits subject to taxation, increasing your overall tax bill.
3. How can I minimize the tax impact of my RMDs?
There are several strategies to reduce the tax consequences of RMDs. One common method is qualified charitable distributions, where you can donate a portion of your RMD directly to a charity, avoiding taxes on that amount.
About Brent
Brent Matthew is the founder and CEO of Scottsdale Wealth Advisory, a full-service fiduciary retirement planning firm serving pre-retirees and retirees across Arizona and multiple states. With a strong commitment to always putting clients first, Brent leads the firm in developing comprehensive, tax-efficient financial plans tailored to each family’s unique goals. He is responsible for researching investment, annuity, and life insurance strategies and building smart asset allocations that reflect both long-term growth and risk management.
Brent is driven by a core belief: “The success of this firm will be measured by the success of the families it represents.” That client-first approach has guided his work since the beginning. He is currently enrolled at the College for Financial Planning and is on track to earn his CERTIFIED FINANCIAL PLANNER® designation. He also holds his Series 65 license and Arizona Life and Health Insurance Producers License.
Outside the office, Brent embraces the Arizona outdoors with “lil B” and their two pomskies, Heimo and Kota. Whether he’s hiking, fishing, dirt biking, skiing, golfing, kayaking, or skeet shooting, Brent finds balance and joy in staying active. He’s also a fan of CrossFit, brunching, and cruising the Phoenix canal system on his beach cruiser—usually with classic tunes from the Marshall Tucker Band, Gordon Lightfoot, or Crosby, Stills & Nash playing in the background. To learn more about Brent, connect with him on LinkedIn.
Advisory services are offered by Scottsdale Wealth Advisory, LLC, an Investment Advisor in the State of Arizona. Insurance products and services are offered through Scottsdale Wealth Advisory, LLC. Scottsdale Wealth Advisory, LLC is not affiliated with or endorsed by the Social Security Administration or any government agency, and is not engaged in the practice of law. Be sure to consult with a licensed financial professional to confirm the accuracy of the insurance product you are considering.
