When you retire, you will find that many aspects of your life change dramatically. On the other hand, there are some things that remain constant. Taxes are one of those things.
While your exact tax situation might change somewhat, it is true that income taxes don’t just disappear once you retire. They remain a part of your life, and even your Social Security benefits can be taxed!
Taxes on Social Security benefits can come as a shock to many retirees. Luckily, there are some ways to minimize these taxes, even if you can’t completely avoid them.
Mind the thresholds. Your total taxable income for the year will determine whether, and how much, your Social Security benefits are taxed. For example, single taxpayers who earn less than $25,000 annually from taxable sources will not pay taxes on their benefits. The same goes for married couples who earn less than $32,000.
However, once singles earn between $25,000 and $34,000, up to half of Social Security benefits can be taxed. For married couples, that bracket lies between $32,000 and $44,000.
For singles who earn more than $34,000, and couples who earn more than $44,000, up to 85 percent of Social Security benefits can be taxed.
Obviously, one solution is to watch out for those earnings thresholds. If you’re close to the bottom end, it can sometimes be better to earn just a little bit less, rather than face a higher rate of taxation.
Establish non-taxable income for retirement. The above thresholds pertain only to taxable income. If you set yourself up with non-taxable distributions from a Roth IRA, for example, that income won’t be counted as a part of your total. This strategy can help you enjoy more income while lowering taxes on Social Security benefits.
Consider deferring your benefits. Some retirees avoid the taxation problem by living on retirement account distributions, while deferring their claim for Social Security benefits until age 70. At that point, you will receive your maximum possible benefit, and then you can lower retirement account distributions according to the above thresholds.
What works for one retiree might not be the best solution for another. So come see us for more personalized guidance, and we can help you decide upon the retirement income strategy that makes the most sense for you.