I received a call late last year from a gentleman in a panic. Him and his wife were both in their early 70s and in the early stages of a comfortable retirement with Social Security, a pension, IRAs and other savings. Plus, their health care costs were fair with both of them being on Medicare and in good health. Thus, they were doing ok. Then all of a sudden they weren’t. The amount of their federal taxes suddenly increased substantially and they received the dreaded notice in the mail telling them that their Medicare Part B and Part D premiums are going up substantially. He called and wanted to know what in the world happened.
This is a common theme that happens to many retirees once they reach the age in their life when they are forced to start drawing money out of their retirement savings plans. These forced withdrawals are called Required Minimum Distributions (RMDs). Unbeknownst to most people, these distributions can have a ripple effect on many facets of your retirement plan.
An RMD is included as taxable income for the year it is taken. This additional taxable income can negatively affect the availability of deductions and other tax saving items. In addition, RMDs are countable in the formula which determines how much of your Social Security is taxed.
Obviously, this is not good news. But, it gets worse. Another significant negative impact of RMDs can be increased Medicare costs. And this is one area that is often overlooked or not even considered when saving for retirement.
Unfortunately, this all came together at once for this particular couple, which caused him to ask that serious question – what in the world happened. After looking into their situation, their RMDs caused 85% of their Social Security to be taxed and it threw them into a much higher tax bracket. All of this then increased their Medicare costs. Thus, all of a sudden, their retirement plan was not comfortable and at risk.
So, how and why did all this happen? And more importantly, what can be done to prevent it? Your first step is to register for an upcoming retirement planning class and get educated. By knowing all of your options, you’ll be able to make informed decisions about your future – and your money.