When it comes to planning for retirement, it’s no surprise that I get many questions about Social Security (SS). After all, for the majority of retirees, Social Security benefits account for a significant percentage of their income. The following are three of the questions that come up often when consulting with my clients:
1. At what age can you draw SS benefits without being taxed?
Though this is not going to be a popular answer, taxation of Social Security benefits has nothing to do with your age. There is a complicated formula used to figure the portion of your Social Security that will be taxed. It might be zero, 50%, or 85%, depending on your income level. The tax rate applied will also depend on your total income. And, by the way, your Medicare Part B premiums are also based on your income . . . higher income equals higher premiums. So, whether you draw it early, at full retirement, or at age 70, the taxation of Social Security benefits depends on your total income at that time and not the number of birthdays!
2. Would you be penalized if you work and collect Social Security?
I’ve written about this many times before, but it is still a frequent question. This answer does depend on your age when drawing benefits. If you draw benefits earlier than your normal retirement age of 66 to 67, you are limited in how much work income you can receive without reducing your benefits. For 2018, that number is $17,040 in earned income. Once you reach your normal retirement age, there is no longer a limit. You can make as much money as you want without having it affect your SS benefit amount.
3. Would IRA withdrawals affect Social Security benefits?
The simple answer is “no.” If someone takes Social Security early, only work income is counted. Dividends, capital gains, pensions, annuities, and IRA withdrawals will not affect whether your SS is reduced; however (and again), these income items could cause more of your Social Security to be taxed.
Social Security can be tricky! A key takeaway from today’s column is that SS decisions need to be made with your overall tax, income and financial situation in mind. Please also remember that my answers here could become obsolete over time as tax laws and Social Security rules change. Always make sure to double-check with your financial planner, or tax professional, before taking any steps that could result in reduced benefit payments or negative tax consequences.