What’s Hatching
- Quarterly Tax Reminder: A friendly reminder for those who do estimated quarterly tax payments: Q3 payments are due by September 15.
- August 30 — National Grief Awareness Day: This day recognizes that healing from loss doesn’t have a prescriptive journey and can be different for everyone. Be kind to yourself and/or others who are in a season of grief and healing.
- Upcoming Office Closure: Please note that the Two Bird office will be closed Monday, September 7, in observance of the Labor Day holiday.
Welcome back to Bird’s-Eye View!
At Two Bird Wealth, we help craft your wealth strategy: This includes topics like when it may be right for you to turn on Social Security and how tax planning might come into play. This month we explore:
- 1. How the timing of Social Security can have a meaningful impact on your income for the rest of your life, and that there are more moving parts than most people expect.
- 2. The interaction between Social Security and taxes can help one make more informed choices about retirement income and withdrawals.
Read on for a deeper dive, helpful resources, and a few things we think are worth knowing this month. And as always, if anything resonates or raises a question, we’re always happy to connect.
When Should You Turn On Social Security? Here Are Some Things to Think About…
Figuring out when to start Social Security is one of the bigger decisions you will make in retirement, and there is no single right answer for everyone. But there are a few things worth thinking through before you make the call.
The earliest you can claim is age 62, but doing so means accepting a permanently reduced benefit. Every year you wait beyond that, your benefit grows, and if you can hold out until age 70, you would be looking at the maximum possible amount. That window between 62 and 70 is where all the planning happens.
Your health and life expectancy matter a lot here. If you are in great shape and have longevity in your family, waiting tends to work in your favor over time. If you have health concerns or need the income sooner, claiming earlier may make more sense for your situation.
Your other sources of income play a big role, too. If you have retirement accounts, a pension, or a spouse still working, you may have more flexibility to delay. If Social Security is going to be your primary income source, the timing decision gets more urgent.
For married couples, the strategy gets a bit more interesting. It can sometimes make sense for the higher earner to wait as long as possible. In the event of one of the spouse’s death, the surviving spouse will receive the larger of the two benefits for the rest of their life.
One thing a lot of people overlook is the tax side. Depending on your total income, up to 85% of your Social Security benefit can be taxable. How and when you draw from other accounts alongside Social Security can affect your tax bill in ways that are worth planning around.
Before you make this decision, talk with your wealth strategist. It is the kind of choice that looks different once you run the numbers against your specific situation.
Social Security and Taxes: What Financial Planning Clients Need to Know
As a CPA, I often get questions about how Social Security benefits are taxed and how to plan to minimize the tax bite in retirement. Understanding the interaction between Social Security and federal (and sometimes state) taxes can help you make better choices about retirement timing, income withdrawals, and tax management strategies.
How Social Security Benefits Are Taxed
Social Security benefits may be taxable depending on your combined income. The IRS computes a provisional income figure (often called “combined income”) as: adjusted gross income (AGI) + nontaxable interest + half of your Social Security benefits.
For individual filers:
- If combined income is below $25,000: benefits are generally tax-free.
- Between $25,000 and $34,000: up to 50% of benefits may be taxable.
- Above $34,000: up to 85% of benefits may be taxable.
For married couples filing jointly:
- Below $32,000: benefits are generally tax-free.
- Between $32,000 and $44,000: up to 50% taxable.
- Above $44,000: up to 85% taxable.
Note that these thresholds are federal guidelines; a few states also tax Social Security benefits. Check your state rules or ask us for specifics.
Key Planning Considerations
- 1. Timing Benefits vs. Other Income: When you claim Social Security matters. Delaying benefits increases your monthly benefit (up to age 70), which can improve lifetime income and reduce the need to withdraw from taxable accounts early. However, larger benefits later can increase your provisional income and therefore taxes on benefits. Balancing taxable withdrawals from IRAs or 401(k)s against Social Security timing is important.
- 2. RMDs and Tax Brackets: Required Minimum Distributions (RMDs) from retirement accounts start at age 73 (as of current law). RMDs can push you into higher provisional income levels, increasing taxation of Social Security. Strategic Roth conversions prior to RMD age can lower future RMDs and reduce combined income, potentially reducing taxes on Social Security benefits.
- 3. Roth Conversions and Income Smoothing: Converting traditional retirement assets to a Roth while in lower-income years can be tax-efficient. Paying tax now on conversions may prevent higher tax exposure later, reduce RMDs, and keep Social Security benefits from becoming taxable, or lessen the taxable portion.
- 4. Filing Status and Spousal Considerations: Spousal benefits and the combined income of married couples affect taxation thresholds. Coordinate withdrawals and benefit claims across spouses to minimize household tax exposure. In some cases, splitting income sources between spouses or staggering benefit claims can be beneficial.
- 5. State Taxes and Other Local Rules: A handful of states tax Social Security benefits, while others do not. Additionally, some states use different definitions of income that can affect your taxability. Michigan does not tax any Social Security benefits across the board. If you live in a different state, we can review your state’s rules and model outcomes.
Recommended Action Steps
- Project combined income for the early retirement years and after RMDs begin.
- Consider partial Roth conversions in low-income years.
- Coordinate Social Security claiming strategy with withdrawals from IRAs, taxable accounts, and pensions.
- Review state tax treatment of Social Security.
If you’d like, we can run personalized projections showing how different claiming ages, Roth conversions, and withdrawal strategies affect both your tax bill and net retirement income. Contact our office to schedule a planning session.
Contact Angie Finch CPA: 734-474-8602 www.angiefinchcpa.com
Angie is not affiliated or registered with CWM, LLC or Cetera Wealth Services LLC. Any information provided by Angie is in no way related to CWM, LLC or Cetera Wealth Services LLC or its registered representatives.
Converting from a traditional IRA to a Roth IRA is a taxable event.
Additional Resources & Reading
Resource: Trump Accounts: A New Way to Invest in Your Child’s Future
This guide provides a clear and easy-to-understand overview of Trump Accounts. It includes a breakdown of key features and outlines how the accounts work, and also provides planning considerations that can be helpful if you are trying to determine if the accounts fit with your existing financial plan.
Article: Social Security Benefits: What’s Your Game Plan?
When it comes to Social Security, claiming early or waiting isn’t always a simple choice – timing, taxes, and household income can all play a role. This piece walks through some key considerations to help you think through your own game plan.
Have a suggestion? Email us at [email protected]
This newsletter is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.
The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Wealth Services, LLC cannot guarantee or represent that it is accurate or complete.
This information may not be relied on for the purpose of determining your social security benefits or eligibility, or avoiding any federal tax penalties. You are encouraged to seek advice from your own tax or legal professional.
