When it comes to Social Security, there are two things that often catch people by surprise and can make an impact on how much benefit you receive. In this post, I’m going to give you some advance notice so you don’t get caught unaware and instead can maximize your withdrawals.  

Surprise #1: Paying Tax on Social Security

 Most states don’t tax your Social Security, but 13 actually do. And, when it comes to the federal taxes, you’ll most likely be expected to pay on 85 percent of the Social Security benefit that you receive. So if you receive $10,000 in social security, $8,500 could be counted as income and taxed at your ordinary income tax rate. If you have more than $44,000 of taxable income, you’ll most likely be paying that 85 percent number. If you’re single, then $34,000 of taxable income is the magic number. These estimates are based on the 2020 numbers.

Where people get caught off guard is in assuming that they won’t get taxed. If you have an IRA or 401k and you plan to use that in retirement, those withdrawals are going to be counted towards your taxable income. This increases the chance you will have to pay tax on your Social Security. As you plan out your cashflow and income plan, make sure that you’re taking into account these tax-planning expenses.

Surprise #2: Not Thinking Ahead About The Best Age To Take Your Benefit

The common thought is to start Social Security as soon as you stop working. If you don’t have a wage coming in anymore, it sounds logical to start taking Social Security. But that might not be the best thing to do. You can start as early as 62 or as late as 70, and your Full Retirement Age (FRA) is likely 66 or 67. If you start collecting before your FRA, you could be reducing your total benefits by up to 30 percent. If you do this, there’s even a chance that the government might withhold some of your Social Security income. And I’ll explain why, but first, here are the details for those born in 1960 or later, who therefore have a FRA of 67.

As you can see in the following chart, if you start collecting Social Security early, your benefits are reduced. If you wait until you reach your FRA, the benefits are unchanged. If you delay and don’t take it at 67, the benefits go up another 8 percent each year that you wait until you have to start taking it at age 70.

Age You Start Collecting Social SecurityChange In Benefits

Something Else To Watch Out For

Another risk of starting Social Security before your FRA is getting some of your benefits withheld by the government because you earned a wage while taking Social Security. Based on the 2021 numbers, if you make more than $18,960, every dollar above that amount could count against you. In other words, if you make over $18,960, $1 for every $2 you earn could be withheld.

For example, if you’re 64 years old and make $29,000 in wages, and you’ve already started your social security, that’s $10,000 over the limit. So, your Social Security could be reduced by $5,000 that year. I also made another video on this topic with some of the specifics and if you’re interested in learning more, click here. But because of this, we sometimes recommend waiting until at least your FRA to begin withdrawing Social Security. And we might even look at other income sources such as your IRA or 401k before starting Social Security.

But, it depends, so be sure and talk to your personal advisor to see what’s best in your situation. I recommend modeling out scenarios of either delaying Social Security and using your IRA, or delaying your IRAs and starting Social Security. See which one makes more sense for you. At 72, you have to take out of your IRAs and 401ks. Your taxes at that age will most likely be higher the longer you delay withdrawing from your IRA or other tax deferred accounts.

But, again, talk to your advisor about the withdrawal strategies. If your advisor doesn’t talk about the things like modeling out these income plans or taxes in retirement, and they only focus on investments, then give me a call. I’d be happy to talk about it with you, or click here to access my DIY Retirement Plan.