How do Required Minimum Distributions impact your taxes?

How do required minimum distributions (RMDs) impact your taxes in retirement? It’s a question more and more retirees are asking as they approach their 70s. Required minimum distributions (RMDs) can significantly increase your taxable income, affect your Social Security benefits, and even raise your Medicare premiums. After years of building savings in tax-deferred accounts like IRAs and 401(k)s, RMDs force you to start withdrawing money, and paying taxes on it, whether you need the income or not. Understanding how required minimum distributions impact your taxes is key to protecting your lifestyle and long-term retirement goals.

What are RMDs and when do they start?

RMDs are the minimum amount you must withdraw each year from certain retirement accounts, including:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• Employer-sponsored plans like 401(k)s and 403(b)s

You must begin taking RMDs by April 1 of the year after you turn 73 (or 75, depending on your birth year under SECURE Act 2.0).

Even if you don’t need the money, skipping your RMD results in a steep IRS penalty: 25 percent of the amount you were supposed to withdraw.

This is one reason why working with a financial advisor can make a big difference. We help clients create an income plan that not only meets their lifestyle goals but also minimizes tax surprises.

How required minimum distributions (RMDs) impact your taxes

RMDs are taxed as ordinary income. That means the amount you withdraw is added to your total taxable income for the year.

Here’s how they can impact your tax situation:

1. Push you into a higher tax bracket
   If your RMD is large, it may push you into a higher tax bracket, especially if you have other sources of income like pensions, part-time work, or Social Security. This means you pay more tax not just on the RMD but on all your income.
2. Increase your Social Security taxation
   Up to 85 percent of your Social Security benefits can become taxable if your total income exceeds certain thresholds. RMDs can tip the scale and increase the portion of your benefits that are taxed.
3. Raise Medicare premiums
   Medicare premiums are based on your modified adjusted gross income (MAGI). Higher income due to RMDs can increase your Medicare Part B and Part D premiums through the IRMAA surcharge.

This is why we encourage our clients to think about RMDs before they begin. Proactive planning can help you avoid income spikes that hurt your bottom line.

How RMDs affect your retirement lifestyle

Many retirees aim for financial freedom and lifestyle flexibility. But RMDs can force withdrawals that you may not need or want. That extra taxable income can:

• Limit your eligibility for tax credits
• Disqualify you from certain income-based programs
• Force you to adjust your monthly budget due to higher taxes or premiums

This is especially frustrating for retirees who have other sources of income and would prefer to let their retirement savings continue to grow. A thoughtful RMD strategy can help you keep more of your money working for you.

Want help crafting a retirement income plan that protects your lifestyle? Our advisors are just a call away.

Saving money for retirement plan. Retirement Conceptual

Smart tax strategies to manage your RMDs

Managing RMDs is about more than just taking the required amount. It’s about making decisions that align with your broader retirement tax plan. Some popular strategies include:

1. Roth conversions before RMD age
   By converting portions of your traditional IRA to a Roth IRA before RMDs begin, you reduce future required withdrawals. Roth IRAs do not have RMDs and qualified withdrawals are tax-free.
2. Qualified charitable distributions (QCDs)
   If you’re 70½ or older, you can donate up to $100,000 per year directly from your IRA to a qualified charity. This satisfies your RMD and keeps the amount off your taxable income.
3. Spreading out withdrawals
   In some cases, it makes sense to start withdrawing from your IRA before RMDs are required to spread out the tax impact and avoid a sudden income jump.
4. Coordinating with Social Security timing
   When you claim Social Security can significantly impact your taxable income. Delaying benefits may reduce the risk of stacking too much income in one year.

Every retiree’s situation is different. That’s why we recommend reviewing your RMD strategy with a professional. At Guerra Wealth Advisors, we help you navigate these decisions so you can feel confident in your retirement years.

RMDs and their effect on healthcare costs

Most people don’t realize that RMDs can have a ripple effect on their healthcare costs. Here’s how:

• Medicare premiums go up: If your income exceeds certain limits due to RMDs, you’ll pay more for Medicare Part B and D through IRMAA surcharges.
• Reduced healthcare subsidies: If you retire early and rely on ACA coverage before Medicare kicks in, RMD income can reduce or eliminate your eligibility for subsidies.
• Impact on long-term care planning: RMD income might influence how much you pay for long-term care insurance or disqualify you from certain Medicaid programs if not planned properly.

A smart tax strategy can help you manage healthcare costs and avoid surprises that eat into your retirement budget.

Don’t wait until your RMD deadline

The best time to plan for RMDs is before you turn 73. This gives you time to:

• Strategically reduce your IRA balance
• Evaluate Roth conversion opportunities
• Avoid tax spikes
• Preserve your eligibility for Social Security strategies and healthcare savings

If you’re already taking RMDs, it’s still possible to manage the tax impact going forward. Every year counts when it comes to optimizing your retirement income.

At Guerra Wealth Advisors, we create personalized Freedom Plans that help retirees stay in control of their finances, taxes, and lifestyle. If you’re not sure what your RMDs will look like, or how they’ll affect your taxes, we can help you get clear answers.

Let us help you plan for your RMDs

Required minimum distributions are just one piece of the retirement puzzle. But they can have an outsized effect on your taxes, Social Security, and long-term financial plan. With the right strategy, you can minimize their impact and feel more in control of your retirement future.

If you’re wondering how required minimum distributions (RMDs) impact your taxes, or want to explore personalized ways to reduce your tax burden, our team at Guerra Wealth Advisors is here to guide you. Book a complimentary consultation and let’s get ahead of it, together.