Sunday, March 24, 2019
Dear Fund Your Life Daily Reader,
Do you like paying taxes?
I'm going to go out on a limb and guess that your answer is "no."
Then you'll be happy to learn that, if you pay attention to your Social Security claiming strategy, there are ways you can use to it reduce—or even eliminate—your income tax bill.
Social Security expert Steve Garfink explains more below.
Read on...
Jon
P.S. Today's your last chance to get your hands on a free copy of Steve's book Retire in Luxury on Your Social Security. Tell us you want it before midnight tonight and we'll send you your copy of the most valuable book on Social Security out there...absolutely free. All the details are here.
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Paul O'Sullivan
Managing Editor, Fund Your Life Daily
P.S. Today's your last chance to get your hands on a free copy of Steve's book Retire in Luxury on Your Social Security. Tell us you want it before midnight tonight and we'll send you your copy of the most valuable book on Social Security out there...absolutely free. All the details are here.
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Taxes and Your Social Security Claiming Strategy
By Steve G.
Bonnie and Bert have $80,000 of total income and pay no federal income tax. Gwen and Gary have $80,000 of total income and pay over $4,000 in tax. What gives?
Both couples are 71. Bonnie and Bert started their Social Security at 70 and collect a bit under $64,000 in benefits and another $16,000 from retirement and taxable investment accounts. (Most states don't tax our benefits, so we are ignoring any state impact for these illustrations.) Gwen and Gary could have collected the identical age 70 benefit if they had waited, but they elected to claim at 62: About $36,000 a year. Their other taxable income is around $44,000 and results in the $4,000 tax bill; they would need nearly $50,000 in other income to have enough after tax income to match Bonnie and Bert. The tax reduces their disposable income by 5%. Each year. It adds up.
And therein lies a valuable lesson about Social Security and income taxes that can guide you in your savings and retirement plans. With tax season just around the corner, this is a good time to get a little good news about Social Security and taxes.
Most people I have met never give a moment's thought to how their benefits are taxed, even after they have started theirs. That can be costly. Let's take a look at three aspects of tax rules and Social Security that you can put to work for you.
First, your benefits receive favorable tax treatment. Even if you have plenty of other income, no more than 85% of your Social Security is subject to income tax. Only about half of people pay any tax on their Social Security, and many of those are folks who collect benefits and are still in the workforce. As we saw for Bonnie and Bert, they pay no federal tax on their $64,000 in combined benefits, even with $16,000 of other income.
Second, because of the favorable tax rules, you might do much better living off your savings and tax-deferred accounts after you retire and waiting to claim your benefits at 70. That is essentially what happened for our two couples. Bonnie and Bert spent from savings while waiting to claim. The result is that they have less in earnings from their remaining savings to add to taxable income.
Gwen and Gary drew their Social Security early so they spent less from their savings and tax-deferred accounts: They have far more income subject to regular taxes. And as you add regular income, more and more of your Social Security is added to the tax bill calculation.
One takeaway from this insight is that many of us can use that time between retirement and age 70 to draw out of our tax-deferred savings at a low tax rate (because we are more likely to have little or no other income at that time). After all, that was the reason to invest in our IRAs and 401ks: Avoid paying tax at a high marginal tax rate to withdraw it at a low rate later.
Third, with a bit of planning you may be able to avoid or minimize any tax on your Social Security income in most years. This works best if you have managed to reduce your tax-deferred holdings so that your required distributions beginning in your 70s are not excessive. Now you just need to control when you realize taxable gains on your savings and investment accounts. For instance, if you build up large capital gains over time, take a large gain in one year, and pay the tax. Then, in other years, let the gains grow again while paying little or no tax.
The tax effects—like everything else with Social Security—are complicated. But with some thoughtful planning you can put them to work for your long term benefit.
Editor's Note: There are so many factors to consider in claiming your Social Security that it can seem a bit daunting. But Steve has made it his mission to take the confusion out of claiming what's yours. Retire in Luxury on Your Social Security is his easy-to-read but powerful guide to maximizing your Social Security benefits. And we'd like to send you a copy for free...but you have to claim it before midnight tonight. Don't be one of the millions of retiree couples who miss out on an average of $120,000 in benefits because they don't know that they're even owed them. Claim your free book here, now, and get ready to retire in luxury.
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