Have you learned the hard way your Social Security benefit could be taxed? A listener question sparked this discussion on Social Security taxation. Discover how Security taxation could affect you in retirement.
(Click the featured times below to jump forward in the episode)
[1:16] – Paying Taxes On Social Security Benefits
- Paul in Overland Park says he was under the impression that he would not have to pay taxes on Social Security benefits. Why do some people pay more than others?
- Some people do not pay any taxes on their Social Security income while others pay taxes on up to 85 percent of the Social Security income they receive.
- Once you’re fully retired, is your Social Security taxable? Maybe.
- David shares some of the history on Social Security and how it started getting taxed.
[3:53] – What Qualifies As Provisional Income?
- It includes every dollar of interest and dividends you earn on your investments.
- It also includes tax-free interest earned on municipal bonds.
- If you’re still working, then your wages are included.
- Pensions are counted toward provisional income as well as money taken out of your 401(k), 403(b), and IRA.
- One half of your Social Security income is also added to the provisional income.
- If all of that equals more than $32,000 and you’re married filing jointly, then your Social Security starts to become taxable.
[5:24] – What Triggers Social Security To Be Taxed?
- There are two main contributors to Social Security taxation. They include monthly pensions and large tax-deferred accounts.
- Most companies give you the option of taking your pension in a lump sum. Doing what’s called a lump sum rollover can help you avoid placing a tax burden on your Social Security.
- If you’ve invested heavily in your IRAs, 401(k)s, or other tax-deferred accounts, then once you turn 70 and 1/2, your required minimum distributions will cause the government to tax your Social Security benefit.
- You can make a choice between contributing to IRAs (tax-deferred) or Roth IRAs (tax free).
- If you’re in your 50s and early 60s, take a look at this now with an advisor.