Before You Claim Social Security, What’s Your Income Plan?

The age at which you claim your Social Security retirement benefits can dramatically affect the amount you’ll receive every month — and for the rest of your life. But age isn’t the only factor to think about as you consider your claiming options.

To help maximize your Social Security benefits, you’ll also want to consider how those payments could impact your overall financial plan from year to year in retirement, especially your taxes.

If you, like many people, will be relying on multiple income streams — payments from a pension, maybe a part-time job and/or withdrawals from a tax-deferred retirement account — it’s critical to coordinate how they’ll all work together and how they will work with your Social Security benefits.

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Here are a few things to think about as you plan your Social Security start date and create your “retirement paycheck.”

1. Do you expect to keep working?

If you haven’t yet reached your full retirement age (sometime between 66 and 67, based on your birth date), there’s a limit on how much you can earn each year while collecting Social Security. If you go over that limit, your benefits could be temporarily reduced.

• In 2024, the threshold is $22,320, which means you can earn that amount without consequences. But beyond that point, for every $2 you earn, you'll have $1 in benefits withheld.
• If you reach your full retirement age (FRA) in 2024, you can earn up to $59,520 without any impact to your benefits. If you go over that amount, for every $3 you earn, you’ll have $1 in benefits withheld.
• Once you reach your FRA, you can work and earn all you want without limits. And your monthly benefit will be recalculated to give you credit for any past payments that were withheld.

The earnings test applies only to earnings from working, by the way; investment income, pensions and retirement plan withdrawals aren’t included in this calculation.

2. What will the tax impact be?

If you want to keep more of what you make from all your income sources — including your Social Security benefits — tax planning is essential.

Many soon-to-be retirees don’t realize that Social Security benefits aren’t completely exempt from income taxes. But the truth is, you could end up paying taxes on as much as 85% of your benefits. Here’s how it works:

• The IRS will look at your “provisional” income to determine if you must pay taxes on a portion of your benefits. Provisional income is calculated by adding your adjusted gross income for the year (not including Social Security income), any tax-free interest you received and 50% of your Social Security benefits.
• If you’re filing as an individual and your provisional income is under $25,000 (or $32,000 if you’re married and filing jointly), you won’t have to pay federal income taxes on any portion of your benefits.
• If you’re filing as an individual and your provisional income is between $25,000 and $34,000 (or between $32,000 and $44,000 if you’re filing jointly), you may have to pay taxes on up to 50% of your benefits.
• And if you’re filing as an individual and your provisional income is more than $34,000 (or $44,000 if you’re filing jointly), you may have to pay taxes on up to 85% of your benefits.

Obviously, if you plan to keep working after you claim your benefits, or if you expect to take distributions from your taxable retirement assets, your provisional income could easily cross these limits. And before you know it, your tax bill could become a tax torpedo.

There are several strategies that could help you avoid or reduce your tax bill.

You might, for example, choose to delay filing for your benefits until you turn 70 and use the money in your tax-deferred accounts — and/or from working — to meet your living expenses in the meantime. Then, at age 70, you would collect increased benefits that would reduce the amount of money you’d need to withdraw from your portfolio.

Another option would be to convert some or all of the money in your tax-deferred retirement account Roth IRA before you file for Social Security. With this strategy, you’ll have to pay taxes on the converted amount up front, but you won’t have to worry about the pile-on effect of paying taxes on your Social Security benefits.

Your financial adviser or tax professional can help you find a strategy that’s the right fit for your needs.

3. Will receiving a pension affect your benefits?

You can receive payments from both a pension and Social Security in retirement — and many people do. But the type of pension you’ve earned may affect your benefit amount.

• If, like most Americans, your pension is from what Social Security refers to as “covered” employment, and you paid Social Security payroll taxes, it won’t have any effect on your benefits.
• But if your pension is from a “non-covered” employer that didn’t withhold Social Security taxes (generally this is federal, state or local government employment), your Social Security payments may be reduced.

The Social Security Administration’s Windfall Elimination Provision calculator can help you understand if and how your benefits will be affected. Your financial adviser should be able to assist you with planning strategies that can help you maximize the benefits for which you are eligible.

You’ll also want to keep in mind the impact your pension might have on your tax bill each year. Remember, your pension may be counted along with other income sources when you calculate your provisional income — which could trigger taxes on a portion of your Social Security payments.

Take the time to run the numbers

The age at which you (and your spouse, if you’re married) claim your Social Security benefits will ultimately determine how much you’ll receive in retirement. But there are several other factors besides age that can play a role in deciding how much of that money you’ll actually get to keep.

By mathematically testing each income source and your overall income plan — looking at tax efficiency, the timing of withdrawals from retirement accounts and the potential longevity of your nest egg using various scenarios — you won’t have to worry about second-guessing the Social Security claiming strategy you’ve chosen.

The tools available on the Social Security Administration’s official website can help you get started. But for information and advice based on your specific needs and goals, it’s a good idea to work with an experienced professional. A financial adviser who specializes in Social Security and retirement planning can help you run the numbers as you research your claiming options.

Kim Franke-Folstad contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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• Calculating Taxes on Social Security Benefits