Very possibly, you may not be able to keep all your Social Security benefits. After all, Social Security currently pays the retired worker an average of $1,918 monthly, and many seniors rely heavily on Social Security check money to make ends meet, at the end of the month when they stop working.
You may be looking forward to receiving a monthly Social Security payments as you begin retirement, but if you plan to keep your entire monthly Social Security check, here’s some disappointing news: There’s a chance you won’t get it, this It’s because the Internal Revenue Service (IRS) might want to keep a portion of those benefits.
Will Your Social Security Benefits Be Taxed?
If Social Security is your only source of retirement income, you’ll most likely be able to maintain all of your monthly benefits—when outside income is added to the mix, that’s when Social Security taxes start to apply.
The problem with taxes levied on Social Security benefits is that they are levied from very low income thresholds, but are based on a specific type of income, combined or provisional income, which is calculated as 50% of the amount of Social Security you receive each year, in addition to the extra income you must present on your tax return.
If you file taxes as a single, a combined income of $25,000 to $34,000 keeps you subject to taxes on up to 50% of your Social Security benefits; once your combined income exceeds $34,000, you risk paying taxes on up to 85%. % of your profits.
If you are married and file a joint tax return, a combined income of $32,000 to $44,000 leaves you subject to taxes on up to 50% of your benefits. Beyond $44,000, up to 85% of your Social Security may be subject to taxes.
As you can see, these thresholds are low enough, let’s say you’re single and you have $1,918 a month in Social Security, or about $23,000 a year, half of that is $11,500, that alone won’t require you to pay taxes. for your benefits, but if you also have access to $14,000 a year between your investments and retirement plan withdrawals, that brings you to a combined income of $25,500 and causes you to not keep your full Social Security benefits.
How to Avoid Paying Taxes on Your Social Security Income
Considering how low the aforementioned thresholds are, one might assume that taxes on your Social Security benefits will be attributed to you, but something you should know is that withdrawals from a Roth retirement plan are not considered income for the purposes of the above calculations.
Going back to our example, suppose that half of your annual Social Security benefit is $11,500, and you receive $3,500 a year in dividends and interest in a non-tax advantaged account, if you subsequently withdraw another $10,500 per year from a Roth IRA, that will not increase your combined income.
And a combined income of $11,500 plus $3,500, or $15,000, is not going to leave you paying taxes on your benefits.
If you are approaching retirement and have been keeping your savings in a traditional IRA or 401(k), you may want to consider a conversion to a Roth, not only for the reason mentioned above, but to enjoy the benefit of tax-free withdrawals throughout your senior years.
