Michele Cagan, a financial advisor and columnist, was asked about the best time to start withdrawing money from a traditional IRA with a current balance of $215,000 to minimize future RMD taxes. At 68 years old, the reader plans to retire by the end of the year and is aiming to wait until age 70 to claim Social Security benefits for a maximum monthly payout.
Cagan advised that managing your retirement income involves several moving parts, including Social Security benefits, required minimum distributions (RMDs), and taxes. She suggested that lowering the amount of money subject to RMDs can help decrease future taxes and prevent higher taxes on Social Security payments.
She also recommended converting a portion of the IRA to a Roth IRA annually if the funds are not needed immediately. This strategy can lower future RMDs and allow for tax-free growth. However, she cautioned that there may be tax implications for specific withdrawals and advised consulting a financial advisor to navigate the Roth conversion process without incurring unwanted taxes.
Regarding Social Security benefits, Cagan explained that delaying claims until age 70 can result in the maximum monthly amount. However, she also recognized specific scenarios where early claims could be more advantageous, such as financial need, poor health, or when a spouse is a higher earner and is delaying their benefits.
Moreover, Cagan discussed the implications of RMDs on taxation and the significance of understanding taxable income when making IRA withdrawals. To mitigate future RMDs and tax bills, she proposed withdrawing from the IRA to decrease the balance, converting traditional IRAs to Roth IRAs, or donating RMDs directly to charity to eliminate taxable income fully. She emphasized that each strategy would have different financial implications and recommended speaking with a financial advisor to decide the best course of action.
Cagan concluded by encouraging readers to find a trustworthy financial advisor to assist in retirement planning and facing important financial decisions. Readers were advised to consider using SmartAsset’s free tool to find vetted advisors in their area and to interview potential advisor matches at no cost. For further advice on retirement planning and investment, readers were encouraged to subscribe to the SmartMoney Minute newsletter.
As a SmartAsset financial planning columnist, Michele Cagan provided answers to readers’ questions on personal finance and tax topics. Readers can submit questions via email, and they may be addressed in future columns.
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