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I will be turning 68 soon and plan to wait to claim my Social Security at age 70 to maximize monthly benefits. I also plan to retire at the end of the year, if not sooner (i.e. in three months or less). Does withdrawing from my traditional IRAs (current balance is $215,000) to reduce income taxes on my RMDs outweigh the benefit of keeping those withdrawals invested and increasing tax deferral? I understand that if I withdraw amounts up to my standard deduction, those amounts will be tax free.
– Austen
Retirement withdrawals, Social Security benefits, required minimum distributions (RMDs), taxes… there are a lot of moving parts when it comes to making decisions about your retirement income. Reducing the amount of money RMDs apply to can help you minimize your taxes once they take effect. This can also help you avoid taxes on your Social Security benefits.
If you don’t need the money now but want to reduce RMDs later, one of the best moves may be to convert part of your IRA to a Roth IRA each year. This can help reduce required withdrawals in the future and allow your money to grow tax-free, although there may be tax implications for certain withdrawals. (A financial advisor can help you through the Roth conversion process and avoid potentially unwanted tax consequences.)
Delaying Social Security benefits until age 70 makes sense for certain people. Then you can receive the largest possible monthly payment. You can start collecting retirement benefits at age 62, but the monthly amount will be reduced by 30%.
For example, if your full retirement benefit is $2,000, your benefit at age 62 will be only $1,400. However, if you wait until age 70, you’ll get a maximum monthly benefit of $2,480.
However, there are some circumstances in which starting earlier may be more beneficial, such as:
• You need the money to make ends meet
• You are in poor health or have a shorter life expectancy
• You are completely done with work
• Your spouse has earned more and will postpone payment
Remember, there is no right answer that works for everyone, and you should do what makes the most sense for your family. (And if you need help planning for Social Security, Consider working with a financial advisor.)
Once you reach age 73, you must begin taking required minimum distributions – also called “RMDs” – from all of your traditional retirement accounts, including IRAs and 401(k)s. Your RMD is calculated based on your age, life expectancy and account balance according to the IRS Uniform Lifetime Table. If you have multiple IRAs, you must calculate the RMDs for each separately.