With Social Security and Taxes, Make Sure You’re Getting the Right Advice

Plenty of experts on Social Security can provide information ranging from reports to analysis pieces about determining the best time to opt into the program to maximize your benefits. However, some of these experts may not give you the whole picture: They may not take taxes into consideration, and that could hurt your retirement plans.

Never underestimate how much of an impact Social Security taxes can have on your retirement. An important, but often misunderstood, factor is your provisional income. Your provisional income determines whether you will be taxed on your Social Security benefits, as well as how much you owe.

The Internal Revenue Service defines provisional income as the sum of your adjusted gross income, non-taxable interest and 50% of your Social Security benefits. If your provisional income is more than $34,000 (for an individual) or $44,000 (for a married couple filing jointly), you can be taxed on up to 85% of your Social Security benefits. As you can see, your adviser might steer you the wrong way if he doesn’t consider how Social Security can impact your taxes as part of your retirement calculations.

Choose your help carefully

It’s also important to gather the correct information on when you should retire and when you should start taking Social Security. Let’s say you retire at 60 and, after talking to an adviser, you decide to start taking Social Security when you’re 66 – which you believe is the optimal time. You will have to live on your assets for the next six years, instead of taking Social Security at 62 and allowing your assets to continue to grow. And, of course, whatever you decide, you need to factor in how it can impact your taxes.

There are some steps you can take to make sure you do not get hit hard by taxes when you retire, but the most important one is making sure your adviser has the experience and knowledge to guide you through retirement. Sure, there are plenty of financial professionals who profess to be experts on Social Security, but they might not be as knowledgeable about how taxes and your investments might impact your benefits. If that’s the case, they potentially can draw up the wrong game plan for your retirement.

What do you look for in a fiduciary adviser? One good benchmark is someone who performs a comprehensive review of your overall financial plan. You want a planner who considers all of your investments and who has the ability to give you guidance on your overall income picture and the impact it can have on your taxes and future income.

Don’t rely on the SSA for guidance

You might be tempted to turn to the Social Security Administration for help, but you might not find the advice you need. Recently, I spoke with a longtime Social Security administrator who offered me some advice on the people he worked with on a daily basis. “The people who work at Social Security are just order takers,” he told me. “They are not there to educate you on how it works. They are basically there to ask what you want to do.” It was an interesting perception from someone who worked at Social Security for more than three decades and a reminder of how important it is to find the right adviser who can help ensure your retirement is set up correctly.

This being the case, you need to work with a retirement planner who knows how provisional income works and how it can affect your taxes. Remember, at the end of the day, some advisers will not tell you where to take income from. You might tell them you need to take income, and they might send it to you with no thought on how it will impact your provisional income and the taxes you will pay on Social Security. You need to work with someone who can tell you what sources to use when you start taking income in your retirement. The majority of financial advisers simply don’t do that. The same holds true for many CPAs. They’re simply not paid to be specialists in Social Security.

Too many of us go into retirement flying blind. After working hard throughout our lives, we assume tax headaches go away when we start taking Social Security. In fact, Social Security can cause tax headaches of its own, unless you work with a financial adviser who helps you find the right strategy to avoid handing more money over to Uncle Sam in your retirement.

Kevin Derby contributed to this article.

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