Once you retire, you will rely upon a combination of Social Security benefits, your pension, and your own savings. After paying taxes on your income all of your life, it might surprise you to learn that your Social Security benefits can be taxed too! But that’s exactly the situation many retirees face. Here are some ways to minimize those taxes.
Watch the thresholds. Your benefits become taxable only after your adjusted gross income exceeds certain thresholds. If you’re single, half of your benefits can be taxed if your income falls above $25,000 but below $34,000. If your income goes above $34,000, up to 85 percent of your benefits can be taxed. For married couples, you won’t pay taxes on half of your benefits until your income goes above $32,000. After income exceeds $44,000, up to 85 percent of benefits can be taxed.
Keep these brackets in mind as you plan for retirement income. If you’re single and considering marriage, this might also be an important factor for you. And of course, remember to keep your information updated; these brackets could change at some point.
Utilize a Roth IRA. Since distributions from a Roth account are not taxable, they also do not count as part of your taxable income. Utilizing this type of account can help to keep your total income below the thresholds for taxation of your Social Security benefits.
Consider taking IRA distributions first. Some retirees choose to begin IRA distributions as early as age 59 ½, while deferring their Social Security benefits. This allows those benefits to grow larger each year, up until age 70. Then, they claim the largest benefit possible. At this time their IRAs might be depleted, or they switch to lower distributions.
This strategy is not right for everyone. To determine whether it might work for you, sit down with us to perform the calculations and weigh the pros and cons.
On that note, give us a call if you’re worried about taxes on your Social Security benefits. We can help you identify different plans to deal with this situation, and choose the path that works best for your unique situation. As always, we encourage you to consult with your tax professional regarding any specific tax questions you may have.
