Strategies to Minimize Taxes on Social Security Benefits

Retirement PlanningSocial Security

Strategies to Minimize Taxes on Social Security Benefits

Posted by COTO Insurance & Financial Services
6 years ago | June 5, 2018

There’s a lot to look forward to in retirement, such as increased travel opportunities, time for your hobbies, and an escape from the daily grind of work. But most of us won’t completely escape income taxes. Even your Social Security benefits can be taxed, depending upon your income. Luckily there are ways to minimize these taxes, if not completely avoid them.

Watch your threshold. Taxes on Social Security benefits are determined by your taxable income (plus benefits). Singles who earn less than $25,000 per year from these sources, or married couples who earn less than $32,000, won’t see their benefits taxed.

However, up to half of your Social Security benefits can be taxed if you earn between $25,000 and $34,000 (for singles) or between $32,000 and $44,000 (for married couples). And up to 85 percent of your benefits will be taxed if you earn more than $34,000 (singles) or $44,000 (couples)!

So, one obvious solution is to mind your brackets. It is often to earn just slightly less than those maximums, than to risk paying extra taxes on your Social Security benefits.

An IRA provides non-taxable income. Of course, since the brackets above only count taxable income, another solution is to set yourself up with non-taxable distributions from a retirement account. Roth accounts are funded with after-tax contributions, so that you can enjoy tax-free income when you retire someday. This income would not be counted as part of the above brackets.

Living on retirement account distributions while deferring Social Security benefits. Another common strategy is to live on retirement account distributions throughout your sixties, while deferring your claim for Social Security benefits until age 70. At this time, you can reap the maximum possible benefits, and then reduce your retirement account distributions to mind the above thresholds.

There is no strategy that is right for every situation, so we urge you not to make this decision on a whim. Give us a call, and we’ll discuss your retirement income plan in more detail, and then craft a strategy to minimize your income tax burden.

949-858-7200 |