Social Security is a source of income that’s important for many senior citizens — including people who do have more than one income stream at their disposal during retirement. Say you are able to amass a good amount of savings. Your savings could generate, say, about $20,000 of additional income every year. If you are used to living on more than that, Social Security might help.
But a lot of seniors are often shocked to learn that they are not entitled to their SS income in full. That is because even the low to moderate earning people will have have to pay taxes on their benefits on the federal level. And if that does happen to you, it will cause your Social Security check to shrink.
Will you lose a portion of your benefits?
It will depend on how high your provisional income is if you will have to pay taxes on your SS income. You can calculate this by taking half of your yearly benefit total and then adding it to your non-SS income.
If your provisional earnings are $25,000 or over and you are single, you will have to pay taxes on your SS benefits that you receive. The same holds true if you are married with provisional earnings of $32,000 or more.
Clearly, these are not big thresholds. Say you are single and are able to collect $1,500 each month, or $18,000 each year, from SS. If you’re withdrawing $20,000 each year from your savings and that is your only other source of income, you will have a provisional income of just $29,000 and a total yearly income of $38,000. That will put you in a position where your benefits will be taxed — even though a yearly income of $38,000 still doesn’t make you retiree that’s wealthy.
How to avoid having to paying taxes on your Social Security
The fact that income is taxed at such low thresholds puts a lot of seniors at a big disadvantage. But there is one thing you could do to lower your chances of being forced to pay taxes on those benefits in the future– save in the correct retirement plan.
If you keep your savings for retirement in a Roth IRA, any withdrawals from that plan will not count for provisional income. So, if you were to take $20,000 each year out of a Roth IRA account and have no other sources of income, and you get $18,000 each year from Social Security, you will keep your yearly income of $38,000. However, you will cut your provisional income down to just $9,000, thereby allowing you to get out of having to pay taxes on the money that SS pays you.
While Roth IRAs do not offer the same type of tax break you will get by investing in a traditional IRA, withdrawals while you’re in retirement are not taxed. And Roth IRAs also provide the benefit of allowing you to keep your cash in your account for ever, whereas all of the other tax-advantaged retirement plans make it a requirement to have minimum distributions.