Once you begin taking required minimum distributions (RMDs) at age 73, you must withdraw a set amount each year from your pre-tax retirement accounts. If you don’t need that money for living expenses, you can still use it productively. Many retirees choose to reinvest their RMDs in a taxable brokerage account, add to emergency savings, buy income-producing investments, pay down debt, or use part of the funds for qualified charitable distributions to reduce taxable income. A financial advisor can help you decide which option supports your overall retirement plan.
Once you take your RMD, the money becomes taxable income, but you can still put it to work. After paying the taxes owed, you can reinvest the remaining funds in a regular investment account. Common options include mutual funds, exchange-traded funds (ETFs), dividend-paying stocks, or high-yield savings products. The goal of this strategy is to keep your money growing, even though it has left your retirement account.
Before reinvesting, think about how soon you may need the money. If you expect to use it within a few years, you may want safer choices such as certificates of deposit (CDs), money market funds, or short-term Treasury bonds. If you can leave the funds invested for longer, a mix of stock and bond funds can offer both income and growth potential. It’s also important to review how new investments could affect your taxes, since earnings in a taxable account may be reported each year.
Reinvesting your RMD can make sense for retirees who already have steady income from Social Security, pensions, or annuities and who do not rely on RMDs to pay regular expenses. It can also work for retirees who want to grow their portfolios for future healthcare costs or leave more assets to heirs. Keeping this money invested can help preserve your purchasing power over time.
After paying the taxes owed on your RMD, you can move the remaining funds from your traditional IRA, SEP IRA, SIMPLE IRA, 401(k), or 403(b) into a regular investment account. This keeps your withdrawn money invested and gives it the potential to continue growing even after it leaves a tax-deferred account.
You can also transfer assets in kind from your retirement plan to a taxable account instead of selling them. This means you move the same investments, such as mutual funds, ETFs, or individual stocks, and the value of that transfer counts toward your RMD. The IRS only requires that you take the withdrawal and pay the tax on it. You are not required to sell or spend the money.
Taxable accounts can generate income and capital gains that you may have to report each year. A financial advisor or tax professional can help you review your reinvestment options, manage the tax effects, and make sure the plan fits your overall retirement goals.
Funding an annuity with RMDs can make sense for retirees who already have sufficient liquid assets for short-term needs and want to secure part of their future income. This strategy turns part of your retirement savings into predictable payments while keeping other assets available for growth or emergencies.
An annuity is a contract with an insurance company that exchanges an upfront payment for a guaranteed stream of income. Some retirees use annual RMD withdrawals to gradually fund an annuity that begins payments in their late 70s or early 80s, when other income sources may decline.
For example, a retiree who receives an annual RMD could use those withdrawals to buy portions of a deferred income annuity. And by age 80, those purchases might provide extra monthly income for life, depending on interest rates and contract terms.
Different types of annuities offer different features. Fixed annuities pay a set amount, while variable and indexed annuities link payments to investment performance or a market index. Some contracts include inflation riders that increase payments over time, though these usually reduce the initial payout. Because costs, surrender periods and guarantees vary, it’s important to compare options before committing funds.
A senior couple reviewing their savings to make sure they have enough cash set aside for unexpected expenses in retirement.
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An emergency fund gives you quick access to cash for unexpected costs such as home repairs, medical bills, or travel to assist family. Having this reserve can prevent you from selling long-term investments at the wrong time.
In retirement, market declines can have a bigger impact because you may rely on your portfolio for income. An emergency fund helps reduce that risk by providing a cushion during periods when markets fall. Instead of withdrawing from your investment accounts during a downturn, you can draw from your cash savings until markets stabilize.
You can keep your RMD funds in safe, interest-bearing accounts such as high-yield savings accounts, money market funds, or CDs. For example, if you receive a $10,000 RMD, placing it in an account that earns 4% annual interest adds both liquidity and modest growth. These accounts protect principal and allow easy access without market exposure.
Reinvesting your RMD in a qualified charitable distribution (QCD) can reduce taxable income and improve the efficiency of your retirement withdrawals. A QCD allows you to transfer up to $108,000 in 2025 from an IRA directly to an approved charity once you reach age 70½1. And if you are 73 or older, the amount transferred also counts toward your RMD, but is excluded from your adjusted gross income (AGI).
Because the QCD amount never enters taxable income, you receive a full benefit even if you use the standard deduction. For example, if your RMD totals $30,000 and you direct $12,000 to a charity through a QCD, only $18,000 appears as taxable income. The smaller income figure can help keep you in a lower tax bracket and reduce the impact of income-based phaseouts.
Lowering AGI can also help you reduce income taxes on Social Security benefits, limit exposure to Medicare income surcharges, and maintain eligibility for certain tax credits.
Even though you cannot use RMD withdrawals to complete Roth IRA conversions, you can use them to pay the taxes triggered by those conversions. So, for example, if your RMD is $40,000, you cannot satisfy that requirement by converting $40,000 to a Roth IRA. You must first withdraw the $40,000 and move it into cash or a taxable account. Once the withdrawal is complete, you can use part or all of that $40,000 to pay the income taxes due on a separate Roth conversion completed that same year.
When you move assets from a traditional IRA or 401(k) into a Roth IRA, the converted amount is treated as taxable income for that year. Using your RMD to cover the tax bill allows you to convert other funds without reducing the total amount added to your Roth account.
This approach can help you manage future tax exposure and reduce required withdrawals over time. Once assets are in a Roth IRA, they are no longer subject to annual RMDs, and qualified withdrawals are tax-free. By using RMDs to pay conversion taxes each year, you can gradually shift money out of taxable retirement accounts and create more flexibility for future income planning.
A retiree reviewing options for using RMD withdrawals, including investing, charitable giving, or building cash reserves for future needs.
Once you start taking RMDs at age 73, you have to withdraw money each year, but you can still use it wisely. After paying taxes, you can invest the rest, build extra income with an annuity, keep cash for emergencies, give through a QCD to lower taxes, or use it to pay taxes on a Roth conversion. Your choice will depend on your income, expenses and goals. A financial or tax professional can help you decide how to make the most of your RMDs.
A financial advisor can help you determine how much to keep in an emergency fund and where to hold it for safety, liquidity, and modest growth. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you want to build your savings up consistently, consider setting up automatic transfers from your checking to your savings accounts. This approach could help you make saving a routine part of your financial life.
“Give More, Tax-Free: Eligible IRA Owners Can Donate up to $105,000 to Charity in 2024 | Internal Revenue Service.” Home, https://www.irs.gov/newsroom/give-more-tax-free-eligible-ira-owners-can-donate-up-to-105000-to-charity-in-2024. Accessed Sept. 19, 2025.
A senior couple dealing with unexpected Social Security taxes, commonly referred to as the Social Security tax torpedo.
While retirees may be chagrined to discover that taxes don’t end when they leave the workforce, an unseen threat looms behind the U.S. tax code. The Social Security tax torpedo is as destructive as it sounds, blowing up the budgets of unsuspecting retired folks eagerly awaiting their first Social Security check. Having a clear understanding of your Social Security taxes could help you dodge this torpedo in retirement. Here’s what you need to know.
A financial advisor can help you create a financial plan to minimize your taxes in your golden years.
What Is Social Security Tax Torpedo?
The Social Security tax torpedo is a spike in taxes retirees can experience after receiving Social Security income. Specifically, 50% to 85% of your Social Security check may be taxable, depending on your income level and life circumstances. In addition, your Social Security income can increase your marginal tax rate, meaning the top portion of your income enters the next tax bracket. As a result, unsuspecting retirees can pay heavier taxes than anticipated, and their Social Security benefits provide less of a financial boost than expected.
Tax Torpedo Implications
The government bases your taxes in retirement on your modified adjusted gross income plus any nontaxable interest (usually from municipal bonds) and half of your Social Security benefits. The resulting sum is called your ‘combined income,’ which incurs different taxes depending on the amount and the filer’s status.
For instance, single filers with a combined income of $25,000 to $34,000 pay taxes on 50% of their benefits. An income above this amount results in taxes on 85% of the benefits. Likewise, those married filing jointly with combined incomes between $32,000 and $44,000 will pay taxes on 50% of their benefits. Any amount above this incurs taxes on 85% of the benefits.
Remember, the tax torpedo doesn’t mean you will lose 85% of your Social Security income taxes. Instead, you’ll owe your regular income tax rate on 85 cents of every dollar you receive from Social Security. In addition, your income tax rate isn’t the same across all your income because of how tax brackets work. The US tax code incurs progressive taxes on your income the higher it is.
For example, say you’re a single filer in 2023 with a total taxable income of $50,000 (putting you in the 22% tax rate for the income above $44,725). Your combined income is $35,000, and you receive $15,000 in Social Security benefits. You’re over the $34,000 combined income limit, meaning you’ll pay taxes on 85% of your Social Security benefits.
This situation means applying your top marginal tax rate (22%) to 85% of your Social Security benefit ($12,750). So, your tax burden from Social Security is a $2,805 expense. If your combined income was $34,000 or less, only half your Social Security would be taxed, a $1,650 expense.
How to Avoid the Social Security Tax Torpedo
A senior calculating his taxes to avoid the Social Security tax torpedo.
Losing your hard-earned Social Security benefits to Uncle Sam isn’t a foregone conclusion. Here’s how to sidestep the Social Security tax torpedo while maximizing your financial wellness and quality of life:
Use a Roth IRA
Roth IRAs are retirement accounts where contributions are made with after-tax dollars, meaning you don’t get a tax deduction when you contribute. However, the distributions during retirement are tax-free. As a result, your Roth IRA income doesn’t count towards your taxable income, reducing the likelihood that you’ll pass the threshold that determines whether 50% or 85% of your Social Security benefit is taxed.
Live in a Tax-Friendly State
Thirteen states tax your Social Security check, adding to the federal tax burden. As a result, you can save on taxes by avoiding residency in the following states:
Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
Washington
Give Your IRA Income to Charity
Qualified charitable distributions (QCDs) allow you to donate money directly from your traditional IRA to charity. The government doesn’t count the first $100,000 of donations as taxable income. While doing so won’t directly affect your Social Security tax, it will lower your overall taxable income, potentially reducing the portion of your Social Security benefits subject to taxation. Remember, this advantage is solely for traditional IRAs.
Buy a Qualified Longevity Annuity Contract (QLAC)
A QLAC is a specialized annuity that provides a guaranteed income stream later in life. You can transfer $130,000 from a traditional IRA or 401(k) to a newly opened QLAC, reducing the required minimum distributions (RMDs) you’ll take from your retirement account. This way, the distributions from your 401(k) or IRA won’t increase your annual income as much, mitigating Social Security taxes.
Your QLAC has a delayed RMD age compared to traditional retirement accounts. While the government requires RMDs from a 401(k) or IRA at age 73, you can delay distributions from your QLAC until you’re 85. Remember, you will owe taxes from QLAC distributions the year you receive them.
Compare Your Income Level to Tax Brackets
Understanding the income thresholds for different tax brackets can help you plan withdrawals from retirement accounts. By staying within lower tax brackets, you may reduce the portion of your Social Security benefits subject to taxation.
Delay Social Security
Taxes on Social Security income can’t apply until you receive your benefits. Therefore, delaying Social Security can help you avoid additional taxation through your 60s. If you can work or survive on other income until age 70, you’ll reap two benefits: first, you’ll maximize your Social Security payment amount. Second, you’ll avoid paying taxes on Social Security. Plus, if you live on a traditional IRA or 401(k) during that time, you’ll reduce your RMDs, giving you more control over your income level in your 70s.
Bottom Line
A senior surprised by unexpected taxes commonly known as the Social Security tax torpedo.
Understanding and proactively addressing the possibility of a Social Security tax torpedo can increase your net income during retirement. By utilizing tools like Roth IRAs, charitable donations, and QLACs, you can create a more tax-efficient retirement.
Additionally, being mindful of how your income level relates to tax brackets and considering delaying Social Security can provide further avenues to optimize your financial well-being and quality of life in retirement. Consulting a financial advisor can be instrumental in tailoring these strategies to your specific circumstances, helping you maximize your hard-earned retirement benefits.
Tips for Avoiding the Social Security Tax Torpedo
Consulting a financial advisor is a crucial step in planning for retirement and avoiding the Social Security tax torpedo as you can get personalized guidance tailored to your specific financial situation, goals, and preferences. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Planning during your working years makes a tax-efficient retirement more doable. However, if you’re already retired, you can still lower your taxes and set yourself up for a brighter financial future.
The simplest answer is yes: Social Security income is generally taxable at the federal level, though whether or not you have to pay taxes on your Social Security benefits depends on your income level. If you have other sources of retirement income, such as a 401(k) or a part-time job, then you should expect to pay income taxes on your Social Security benefits. If you rely exclusively on your Social Security checks, though, you probably won’t pay taxes on your benefits. State laws vary on taxing Social Security. Regardless, it’s a good idea to work with a financial advisor to help you understand how different sources of retirement income are taxed.
Is My Social Security Income Taxable?
According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income (combined income = adjusted gross income (AGI) + nontaxable interest + half of your Social Security benefits).
If your combined income is above a certain limit (the IRS calls this limit the base amount), you will need to pay at least some tax.
The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.
Calculating Your Social Security Income Tax
If your Social Security income is taxable, the amount you pay in tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income that’s less than $25,000, you won’t have to pay taxes on your Social Security benefits in 2021, according to the Social Security Administration.
For the 2021 tax year (which you will file in 2022), single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income (meaning on your Form 1040) will be the lesser of either a) half of your annual Social Security benefits or b) half of the difference between your combined income and the IRS base amount.
Let’s look at an example. Say you’re a single filer who receives a monthly benefit of $1,543, which is the average benefit after the cost of living increase in January 2021. Your total annual benefits would be $18,516. Half of that would be $9,258. Then let’s say you have a combined income of $30,000. The difference between your combined income and your base amount (which is $25,000 for single filers) is $5,000. So the taxable amount that you would enter on your federal income tax form is $5,000, because it is lower than half of your annual Social Security benefit.
The example above is for someone who is paying taxes on 50% of his or her Social Security benefits. Things get more complicated if you’re paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
How to File Social Security Income on Your Federal Taxes
Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. This will be in box 3 of your Form SSA-1099. Then, on Form 1040, you will write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.
Note that if you are filing or amending a tax return for the 2017 tax year or earlier, you will need to file with either Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.
Simplifying Your Social Security Taxes
During your working years, your employer probably withheld payroll taxes from your paycheck. If you make enough in retirement that you need to pay federal income tax, then you will also need to withhold taxes from your monthly income.
To withhold taxes from your Social Security benefits, you will need to fill out Form W-4V (Voluntary Withholding Request). The form only has only seven lines. You will need to enter your personal information and then choose how much to withhold from your benefits. The only withholding options are 7%, 10%, 12% or 22% of your monthly benefit. After you fill out the form, mail it to your closest Social Security Administration (SSA) office or drop it off in person.
If you prefer to pay more exact withholding payments, you can choose to file estimated tax payments instead of having the SSA withhold taxes. Estimated payments are tax payments that you make each quarter on income that an employer is not required to withhold tax from. So if you ever earned income from self-employment, you may already be familiar with estimated payments.
In general, it’s easier for retirees to have the SSA withhold taxes. Estimated taxes are a bit more complicated and will simply require you to do more work throughout the year. However, you should make the decision based on your personal situation. At any time you can also switch strategies by asking the the SSA to stop withholding taxes.
The Impact of Roth IRAs
If you’re concerned about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before contributing it to your Roth IRA, you will not pay any taxes when you withdraw your contributions. You also do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401(k) plans, which require you to begin withdrawing money once you reach 72 years old, or 70.5 if you were born before July 1, 1949.
So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA won’t count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement.
Another thing to note is that many retirement plans allow individuals, aged 50 years or older, to make annual catch-up contributions. You can make catch-up contributions up to $1,000. These must be made by the due date of your tax return. You have until April 15, 2022 to make the $1,000 catch-up contribution apply to your 2021 Roth IRA contribution total.
State Taxes on Social Security Benefits
Everything we’ve discussed above is about your federal income taxes. Depending on where you live, you may also have to pay state income taxes.
There are 12 states that collect taxes on at least some Social Security income. Two of those states (Minnesota and Utah) follow the same taxation rules as the federal government. So if you live in one of those two states then you will pay the state’s regular income tax rates on all of your taxable benefits (that is, up to 85% of your benefits).
The other states also follow the federal rules but offer deductions or exemptions based on your age or income. So in those nine states, you likely won’t pay tax on the full taxable amount.
The other 38 states (plus Washington, D.C.) do not tax Social Security income.
State Taxes on Social Security Benefits
Taxed According to Federal Rules: Minnesota, Utah
Partially Taxed (Exemptions for Income and Age): Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Vermont, West Virginia
No State Tax on Social Security Benefits: Alabama, Alaska, Arizona, Arkansas, California, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming
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Bottom Line
We all want to pay as little in taxes as possible. That’s especially true in retirement, when most of us have a set amount of savings. But consider that if you have enough retirement income that you’re paying taxes on Social Security benefits, you’re probably in decent shape financially. It means you have income from other sources and you’re not entirely dependent on Social Security to meet living expenses.
You can also save on your taxes in retirement simply by having a plan. Help yourself get ready for retirement by working with a financial advisor to create a financial plan.
Tips for Saving on Taxes in Retirement
Financial advisors can offer valuable guidance and insight into retiree taxes. Finding a qualified financial advisor doesn’t have to be hard. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
What you pay in taxes during your retirement will depend on how retirement friendly your state is. So if you want to decrease tax bite, consider moving to a state with fewer taxes that affect retirees.
Another way to save in retirement is to downsize your home. Moving into a smaller home could lower your property taxes and it could also lower your other housing costs.
