When it’s time to consider signing up for Social Security, turn to your financial advisor for advice and recommendations. Social Security is challenging with numerous complex rules that are confusing. Recent changes have added to the difficulty in how to correctly interpret the law’s meanings and how choices can impact you long-term. Often, those who are relying on Social Security Administration (SSA) assistance, find their recommendations are not the best choices for their unique situation. Read on for tips on claiming Social Security.
The Social Security Administration has received criticism. The U.S. Senate Special Committee on Aging urged the SSA to improve the recommendations it provides to individuals. Their concern was based on a U.S. Government Accountability Office (GAO) report that emphasized inconsistencies in the recommendations that the SSA and its claims personnel were giving to people applying for benefits.
Although progress is being made toward more carefully making recommendations to claimants, the SSA can’t replace the knowledge and experience of your financial advisor. They understand your specific circumstances, your financial picture, and can educate you on the benefits and pitfalls for how and when to apply for Social Security.
Retires typically want to maximize their Social Security benefits and minimize taxes and penalties. The SA provides individuals nearing retirement age with information on how much you’ve earned and paid into Social Security to date. This is communicated by a mailed statement or by accessing online at ssa.gov/myaccount. The information includes how much Social Security you will receive at various retirement ages, if you become disabled, and amounts that your family may receive at your passing. This is basic information that is annually recalculated but doesn’t provide guidance on determining how to best optimize the mix of Social Security income, taxes, and penalties.
Avoid Taking Social Security Early
By signing up for Social Security at age 62, your payments are reduced by 25% compared to the standard rate. In retrospect, if you regret your early decision, there are a couple of options. Within 12 months of starting Social Security, you have the option to repay all the money received, without interest, and withdraw your Social Security application. You can sign up for larger payments by refiling later.
The second option, if you’re between ages 66 and 70, is to suspend your Social Security payments, allowing them to grow early delayed retirement ‘credits’ and quality for higher payments when you resume payments. This option will increase your payments by approximately 8 percent each year of suspension.
Increase Social Security Payments
The Social Security wage base was increased to $128,700 for benefit calculations. A higher salary up to this limit, will result in larger retirement payments. Social Security uses the 35 years that you earned the most to calculate benefits. If you earn more now than you did in your early employment years, each year you continue working will replace on of your lower earning years meaning a larger payment.
Minimize Social Security Taxes
If you do not have an income other than Social Security and wait until full retirement to claim, you technically would not owe tax. However, if you have taxable income from other sources and continue to work at least part-time, you will likely owe tax on Social Security.
If the sum of your adjusted gross income, nontaxable interest, and half of your Social Security benefits tops $25,000 for individuals and $32,000 for couples, income tax would be due on as much as half of your benefit. If income exceeds $34,000 for individuals and $44,000 for couples, up to 85 percent of your benefit would be taxable. This includes income from sources such as traditional 401(k) and IRA withdrawals, pension payments, interest received, dividends, and any earnings from working. However, if you take traditional 401(k) and IRA withdrawals before you filed for Social Security, that would not create taxes on your Social Security payments. If it’s been five years since your Roth IRA fund was established, your Roth withdrawals would not be taxable.
A Summary of Recommendations May Include:
- Not taking money out of retirement accounts such as traditional IRAs, and 401(k)s until you reach age 70.5.
- Selecting investments that don’t generate much taxable income such as stocks that don’t pay dividends, tax-managed mutual funds with low or no taxable distributions, etc.
- Converting IRAs or otherwise placing money in Roth IRAs and Roth 401(k)s were earnings are not subject to tax if the account is held fives years of more and your over 59.5 years old.
- Giving away income-producing assets to children, relatives, or charities.