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  • Retirement and Annuity Advisor Jennifer Lang

How Delaying Social Security Pays Off

The term “tax torpedo” alludes to the apparent unfairness of such a high tax being imposed on retirees with moderate incomes who are dependent on Social Security benefits for much of their retirement income.

The Social Security taxation formula can cause a taxpayer’s marginal income tax rate to exceed the top rate applicable to the highest income earners.

Two conditions create the tax torpedo:

  • Income thresholds applicable to tax on Social Security benefits have not been indexed to inflation or changed since the initial laws authorizing income tax on Social Security payments over 20 years ago were enacted.

  • Inflation has reduced these formerly high income levels to moderate income levels, thereby exposing many middle income retirees to a high marginal tax rate.

Combining taxable IRA and retirement plan income with Social Security income in the same year triggers the torpedo, causing retirees’ effective tax rates to soar.

State income taxes can also amplify the tax torpedo effect. However, the effect can be reduced or avoided by taking IRA or other retirement plan distributions first and claiming Social Security retirement benefits later.

This tactic gives the Social Security benefit time to “mature,” resulting in a higher benefit later and ultimately reducing the amount of taxable income that a person will need to withdraw from IRAs and other taxable accounts during their retirement years.

Taking smaller IRA and other plan withdrawals will result in a lower adjusted gross income, which may increase the possibility that Social Security benefits will remain tax free.

Bottom Line: The More You Have In Your 401(k) Or IRA, The More You'll Lose To Taxes. AND The More Money You Receive From Your 401(k) or IRA, The More Of Your Social Security You'll Lose To Taxes. Contact for a no-market risk retirement strategy to protect against market volatility, loss of principal and provide guaranteed growth.

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