I have been thinking about retirement for some time now. Recently, at a family reunion of sorts, I had a conversation with a relative who I hadn't seen in a while. She retired a year earlier. I mentioned to her that one of the things I liked about retirement in Mississippi is the fact that the state does not tax Social Security income or income from pensions, IRA's, or 401k accounts.
She informed me, in no uncertain terms, that Social Security income was taxable and that she paid taxes on it and she wasn't very happy about it. Contrary to my normal argumentative nature, I decided to just go and make myself another pulled pork sandwich and find someone else to visit with.
What I Know:
I have to admit, she got me thinking about Social Security taxes and I decided that I needed to look into it a little bit more, before I began taking it and being surprised. If there's one thing I don't like, it's suprises.
So, I decided to look at the tax consequences of Social Security and I found out some interesting things about the program and how it is taxed. Here is a link to the Social Security website.
You will have to pay Federal taxes on your Social Security benefits if you file a Federal tax return as an individual and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total income of more than $32,000.
But, there is some good news. Social Security exempts 15% of your benefit from taxes. That means that only 85% of your Social Security is subject to Federal income taxes--not the entire amount.
Dig a little further and you will find this
- file a federal tax return as an "individual" and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. If that income is more than $34,000, up to 85 percent of your benefits may be taxable.
- file a "joint return," and you and your spouse have a combined income* that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits. If that income is more than $44,000, up to 85 percent of your benefits may be taxable.
What You Should Know:
For all intents and purposes, there are three times when you can begin to draw Social Security income. If, like me, you were born between 1943 and 1954, you can draw Social Security at age 62 (a reduced amount); at age 66 (full retirement age); or at age 70 where you will receive the maximum Social Security benefit (as high as it will get).
Every year, you should be getting a document from the Social Security Administration that outlines your contributions and your retirement benefits. If you don't have one, you can go online to their website (linked above) and get your statement directly from them with secured access.
In my case, here's how the numbers shake out. I could have begun drawing Social Security at age 62. My monthly benefit would have been $1848 a month. By waiting until age 66, which would be my "full retirement age" that income would be $2379 a month. Now, if I wait to get my maximum benefit at age 70, that monthly income would be $3191 a month or $38,148 a year.
Other considerations you will need to be aware of:
1. Are you going to draw Social Security and still work? Well, that presents a few issues as well.
If you are under the "Full Retirement Age" you can earn up to $15120 a year in gross wages (in 2013). Your Social Security income will be reduced $1 for every $2 over $15120 that you earn.
In the year you reach "Full Retirement Age" (66 in my case) you can earn $40,080 in gross wages (in 2013). Your Social Security income will be reduced $1 for every $3 over $40,080 that you earn.
After you have reached the Full Retirement Age--that is you have turned 66--then you are allowed to continue working, receiving income from your job and have no reduction in your Social Security benefits.
Summary and Conclusion:
I did some additional research with the state of Mississippi and I have discovered that Social Security is not taxed by my state. Additionally, my state does not tax pension income, nor does it tax income taken from 401k plans or IRA's. You should check your own state's treatment of retirement income and Social Security in order to put together a plan of action that makes the most sense for your particular situation. Here is a link to a website that breaks down tax treatment in all 50 states. Well worth the look.
Looking at your own situation, you cannot plan your Social Security game plan soon enough. Take the time to sit down with your CPA or an Elder Care Attorney and explore your options.
In my next article, I will be exploring a decision to wait until age 70 to begin receiving Social Security benefits. As a Dividend Growth investor, I want to show you an option that you may not have considered.
That option is waiting until age 70 to receive the maximum benefit from Social Security, and using your DG retirement portfolio (be it 401k, Traditional IRA, or Roth) as your vehicle to a better retirement with minimal taxes.