If you’re trying to determine the right time to begin collecting Social Security benefits, one major consideration should be your tax situation and what amount of your social security benefit would be taxable as a result. With careful planning, you could avoid some or all of the tax on Social Security benefits and significantly reduce your tax burden.

How Are Social Security Benefits Taxed?

How much of your Social Security benefits are taxable is determined by your “provisional income,” which is the sum of half of your Social Security income for the year and your modified adjusted gross income (which includes some tax-exempt income, such as that paid by municipal bonds).

The Social Security tax income thresholds are listed below. Once you cross the income threshold based on your federal tax filing status, the appropriate portion of your Social Security benefits become treated as taxable income.

In addition, residents in these 13 states will have to pay state income taxes: West Virginia, Vermont, Utah, Rhode Island, North Dakota, New Mexico, Nebraska, Montana, Missouri, Minnesota, Kansas, Connecticut, Colorado.

How Can You Avoid Getting Taxed on Your Social Security Income?

Here are three tips:

1. Move some of your taxable retirement savings into a Roth IRA well before you retire.

Yes, you’ll take a tax hit at the time of conversion. But, when you draw the money in the Roth IRA after you begin collecting Social Security, you won’t need to pay taxes on it.

2. Don’t begin collecting Social Security until after you’ve withdrawn your pretax retirement savings.

This is a smart strategy for two reasons:

  • First, you can avoid crossing the income threshold that would increase the tax you’d pay when you start collecting Social Security.
  • Second, delaying Social Security benefits can increase the amount that you’ll eventually start collecting.

3. Get a qualified longevity annuity contract (or QLAC). This single-premium annuity that may help reduce your tax burden on your Social Security benefits. You fund a QLAC from pretax money (such as that from a traditional IRA or 401(k) plan). The insurance company invests your premium during the QLAC’s deferral period, and you can delay receiving regular installment payments until you’re older—up until you’re 85. The downsides of a QLAC include a limit on premiums (currently the lesser of $135,000 or 25% of your pretax retirement savings). Another factor to consider is whether you’ll even be alive to receive the QLAC’s income installment payments.

If you’d like to talk about other strategies to reduce the chances of higher taxes on Social Security benefits, our experienced financial advisors can brainstorm with you. Click here to set up an appointment with one of them.


Alli Thomas

Alli Thomas has worked in the financial services industry for nearly 20 years, with a focus on retirement-related investing. She began her career as a FINRA-licensed participant-services call-center associate at Vanguard, and then moved to Principal Financial Group, where she worked closely with employers, assisting with retirement plan set-up and design, selecting appropriate plan investment offerings, and maximizing employee participation through targeted education campaigns and enrollment meetings. Alli has also worked as a qualified 401(k)administrator and registered investment advisor for several small investment firms. She now writes about all things investment- and finance-related, leveraging her extensive experience and passion for retirement planning to help investors make well-informed financial decisions.

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