This retirement plan rule could cause your social safety advantages to be taxed Private Finance
The amount of your RMD depends on your life expectancy and your retirement plan. But there’s a huge penalty if you don’t take one – you lose 50% of every dollar that you can’t remove from your retirement account. In other words, if your RMD is $ 10,000 for a given year and you don’t take any of that, you will forego $ 5,000.
The problem with RMDs, of course, is that they automatically create a tax liability when withdrawn from a traditional IRA or 401 (k) since the money you withdraw is taxable. However, this isn’t the only damage RMDs can cause. If your RMD is high enough, it could cause you to exceed the limit at which your social security benefits become taxable at the federal level.
Whether social security is taxed depends on your provisional income, which is 50% of your annual benefit plus your non-social security income. If your total as a single taxpayer is between $ 25,000 and $ 34,000, you could be taxed up to 50% of your benefits, and beyond $ 34,000, you risk tax on 85% of your benefits.
These thresholds are higher for married couples filing together. A provisional income between $ 32,000 and $ 44,000 could mean taxes on up to 50% of benefits and 85% of benefits above $ 44,000.
Let’s say you are single and you earn $ 18,500 annually on Social Security. That alone puts you well below the threshold for taxing that income. Suppose you also piled a nice egg and your first RMD is $ 16,000. That puts your provisional income at $ 25,250 ($ 16,000 + $ 9,250), which means you fall into the category where you may be taxed on your benefits.