Solving the Social Security Tax Bubble Mystery, Ep #101


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By Financial Symmetry, Chad Smith, and Mike Eklund. Discovered by Player FM and our community — copyright is owned by the publisher, not Player FM, and audio is streamed directly from their servers. Hit the Subscribe button to track updates in Player FM, or paste the feed URL into other podcast apps.

Are you in the Social Security tax bubble?

Tax rules are complicated enough, and Social Security benefits during retirement years add another layer of complexity.

Watch corresponding Youtube video here:

Your Social Security income can cause your actual tax rate to be much higher than expected. Not understanding how and when Social Security benefits are taxed can lead to an unpleasant surprise when Uncle Sam comes calling.

You’ll also learn why multi-year tax planning is so important in retirement.

How should you decide when to take Social Security?

If you are approaching age 62 you may be considering when to take Social Security. It can be tempting to take that low hanging fruit as soon as possible. But we often recommend that you delay taking your Social Security benefit for as long as you can. If you don’t take Social Security early then you need to think about how you’ll make enough money to cover the costs of your lifestyle. Do you have IRA’s, 401K’s, or even an old-fashioned pension? When planning your retirement income you’ll also want to think ahead to age 70 ½ when you’ll have to take the required minimum distribution or RMD. Have you decided when to take your Social Security benefit?

Social Security tax bubble or tax torpedo?

Your Social Security benefit can be taxed like any other income source. But there is a way to determine if and how your benefit will be taxed. You can use a special calculation that is determined by the IRS. To do this, add up your taxable income and add half of your projected benefit. If it is over a certain threshold then it will be taxed. You’ll need to be careful when determining your income since tax rates increase slowly and then suddenly jump from 22% to 41%. You don’t want those taxes to torpedo your retirement planning. Listen in to find out how to plan ahead.

It pays to plan ahead

Sure, you want to pay the lowest amount in taxes each year, but retirement tax planning is a bit more complicated. You’ll want to consider your lifetime tax bill. You don’t want to pay 0% in taxes this year only to be stuck with a 24% tax bill next year. You’ll want to have a comprehensive retirement plan which considers when to take out more money for those big-ticket items that will inevitably come up. With a little bit of planning, you can spread your tax burden out over multiple years. You also need to consider that your 60’s provide you with a unique opportunity to name the income that you won’t have in your 70’s. Discover why your 60’s may be the most important tax planning decade by listening to Will Holt’s tax expertise.

Understand all the tax opportunities and risks that are out there

There are plenty of risks involved with retirement tax planning but there are also lots of opportunities to save on taxes as well. One tax opportunity you shouldn’t miss is topping out your tax bracket with Roth conversions to help minimize your RMD once you turn 70 ½.

If you are planning to retire early the Affordable Care Act could throw you another curveball. It is important to understand the income levels needed to qualify for the subsidies available. There is a lot to consider when in retirement tax planning.

Financial Symmetry is a Raleigh Financial Advisor. Proudly serving clients by providing financial planning to the Triangle residents of North Carolina for 20 years.

Outline of This Episode
  • [1:27] When should you take Social Security?
  • [4:12] A brief overview of the Social Security tax bubble
  • [9:00] Why you should not only consider this year’s tax bracket
  • [13:22] Can you change your mind when to take Social Security?
  • [15:44] Why would someone take Social Security early?
  • [17:32] What are other considerations?
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105 episodes