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Timing Social Security: A Tax Perspective

Minimizing taxes in retirement is just as important as it is during your working life – but since the source of your income has changed, you need to deploy different strategies. We’ll take a look at what assets are taxed and how a thoughtful plan that incorporates timing your withdrawals and paying attention to how you rebalance your portfolio can reduce them.

Pre-retirement Planning for Taxes on Social Security

Up to 85% of your social security income may be subject to taxes if your provisional income exceeds either $34,000 for a single filer or $44,000 for a couple.1 Provisional income is calculated by adding your adjusted gross income, nontaxable interest and half of your social security benefits. By decreasing adjusted gross income, you can potentially lower provisional income enough to reduce your tax liability.

Thinking about the order in which you tap retirement income can both increase income and reduce tax liability. Waiting until age 70 to claim social security will increase your benefit to the maximum amount, which will allow you take less from 401(k) or IRA accounts. In addition, if you still want to retire earlier, funding the years between retirement and accessing social security benefits with 401(k) or IRA withdrawals will reduce the value of those plans, so that once the required minimum distribution (RMD) kicks in at age 73, you’ll be taking the RMD from a smaller base, which will reduce income.

Another strategy is to convert 401(k) or IRA plans to a Roth, which allows for tax-free distributions. Both of these strategies require some advance planning – you want to start thinking about the income tax picture along with your pre-retirement planning so you can factor it in to your decision-making process.

If You’re Already Retired

There are still steps you can take to reduce your taxes. Tax-loss harvesting, in which you take distributions by liquidating some positions that have generated losses can create a tax offset to any capital gains you may have generated.

The Bottom Line

Setting up a solid plan for your retirement isn’t just about figuring out how much income you’ll need and what investments will create it for you. It’s also important to think through what your sources of income are, and in what order you’ll tap them, to make sure that you are maximizing income and minimizing income tax.

1. Social Security Administration. Income Taxes and Your Social Security Benefit.

If you’d like an objective second opinion about your finances, please contact Michael Shea, a CERTIFIED FINANCIAL PLANNER™ and owner of True Equity Wealth Management LLC. Email him at michael.shea@trueequitywealth.com or fill out a contact form.

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