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I looked at collecting at FRA and simply banking it but the federal income tax, if you are still working, tells me it just isn't a good idea.
John decides to collect his FRA benefit which is $2,250 for $27,000.
John continues to work full time and earns $70,000.
Using this work sheet 85% of John's SS is subject to federal income taxes and he can expect to pay $5,738 in federal income tax from his SS benefit alone in addition to paying federal income tax on his wages.
If John worked part time earning $20,000 only 16% of his benefit would be subject to federal income taxes increases his federal taxes by $1,062.
But if John waits to age 70 his benefit would increase by 32% to $2,970 giving $35,640 for the year.
Of course if John continues to work beyond age 70 he's gonna pay a lot of federal tax on that money but if he doesn't the entire $35,640 is free of federal income taxes.
I am still working full time and it is the income tax that keeps me from collecting more than anything else. If it were like days of old, back when social security was not subject to any income taxes, the smart move for me would be to collect now, bank it and in four years have an additional $100k in the bank.
I think it all depends on whether or not you are going to work and how much you expect to earn.
I assume that in your scenario John is not planning on receiving (traditional) IRA distributions, dividends, earned interest, etc. Add those in and John will eventually be taxed on his SS. IOW, does John intend to live on his social security check alone?
<snip>
you also have zero protection against medicaid increases that are larger than cola's while you delay. <snip>
Are you referring to Medicare's "hold harmless clause" ? I don't think it would have much impact on those who can easily afford to accumulate retirement credits but I suppose it could derail those who are trying to earn a few more dollars by waiting to collect their SS benefit post FRA.
I assume that in your scenario John is not planning on receiving (traditional) IRA distributions, dividends, earned interest, etc. Add those in and John will eventually be taxed on his SS. IOW, does John intend to live on his social security check alone?
How much do people normally take out of their IRA'S?
If John took ss at 70 collecting $35,640 for the year and at the same time too $12,000 from his IRA 6% of his ss benefit would be subject to taxes resulting in a $602 annual tax against his ss benefit. If he took $24,000 from his IRA 31% of his social security would be subject to federal income taxes resulting in $2,787 taxes against his social security benefits.
Where it gets interesting is if John has a wife who is collecting 50% of his FRA benefit which would be $13,500 bringing their combined ss benefit to $49,140 for the year. If ss was all they got their tax rate would be a big fat zero on their ss benefit. I submit to you that in most parts of the country a retired couple can live reasonably well on a tax free $49,140.
If the married couple took took $12,000 from an IRA the tax on their combined ss would still be a big fat zero. I don't know what the tax, if any, on the $12,000 would be but I doubt it would be much.
If the same married couple took $24,000 from an IRA the tax on their combined ss benefits would still be a big fat zero and I just have to think a couple could live pretty darn well on $73,140 "after taxes" in a year.
But what if John and his wife DIDN'T have an IRA account so he kept a job earning $24,000 to make up for not having an IRA account?
In this case 20% of their combined ss benefit would be subject to federal income taxes resulting in a $2,471 tax bill against their social security alone.
What would happen if their ss benefit was just $24,000 and to keep afloat they both had to work part time jobs earning $30,000 in a year? In this case 21% of their messily benefit would be subject to taxes resulting in a tax of $1,250 for the year Meanwhile the John and Alice not working and taking home $71,340 would pay nothing.
Oh well, just another example of our government looking out for the little guy!
Of course if John continues to work beyond age 70 he's gonna pay a lot of federal tax on that money but if he doesn't the entire $35,640 is free of federal income taxes.
Not exactly, right? because whether John works or not....how much of his social security is taxed is determined by whether his OTHER retirement income (withdrawals from 401Ks, pensions, etc) PLUS 1/2 his soc. sec..puts his MAGI to the point where his SS is still taxable.
He could end up paying tax on his SS regardless of whether he works or not.
My understanding that a couple who has a combined income of more than $32,000 will pay taxes on the Soc. Sec. So they'll likely end up with some of their SS taxed, regardless.
i think what happens is once folks fully understand the true cost of waiting if they retire but delay the actual gain by waiting isn't that great.
it is more a case of not looking at hings correctly.
they get blindsided by the fact that it is spoken about in terms of being rewarded with a 6% return for every year you wait until fra or 8% until 70 but it isn't a 6% or 8 % return since you are giving up checks and spending down invested assets .
at first i was going to delay , then i looked at he actual break even of 22-24 years when all was calculated in to the equation and realized that unless one of us lives until 90 we barely see more by filing earlier.
to see just a 5% difference requires one to live to at least age 90.
while the checks are bigger what you give up in not getting checks for years and spend down early on eats up a lot of those larger checks .
Exactly! I keep coming back to this in my mind. I'll be 61 in Sept. Retiring in Oct. Even though I will get a pension that I can come close to living on, the extra 20k a year I will get in ss payments at 62 would be very nice. I have some money that's invested in a simple index, but "only" in the low triple figures .
I could make a case for collecting ss at 62 or waiting. 62 would mean letting investment money grow and not worrying about dying before I collect as etc. plus, it would mean not being concerned about being more frugal with the pension money nor worrying about spending too much of the investment money down (if indeed I need it).
Waiting would mean having a larger ss check later but being concerned with what I mentioned above. Perhaps a middle ground would be to not collect right at 62 but wait a year and see how my situation looks. (Am I satisfied and can live off pension ok without drawing down too much investment money, etc.?)
I still have a little over a year to beat this to death. LOL.
Not exactly, right? because whether John works or not....how much of his social security is taxed is determined by whether his OTHER retirement income (withdrawals from 401Ks, pensions, etc) PLUS 1/2 his soc. sec..puts his MAGI to the point where his SS is still taxable.
He could end up paying tax on his SS regardless of whether he works or not.
My understanding that a couple who has a combined income of more than $32,000 will pay taxes on the Soc. Sec. So they'll likely end up with some of their SS taxed, regardless.
It is not $32,000 but one half of $64,000 which gives you the $32,000.
A quick way to find out if any of your benefits may be taxable is to add one-half of your Social Security benefits to all your other income, including any tax-exempt interest. Next, compare this total to the base amounts below. If your total is more than the base amount for your filing status, then some of your benefits may be taxable. The three base amounts are:
$25,000 - for single, head of household, qualifying widow or widower with a dependent child or married individuals filing separately who did not live with their spouse at any time during the year
$32,000 - for married couples filing jointly
$0 - for married persons filing separately who lived together at any time during the year
If a couple together only receives a combined $64,000 in social security benefits they don't pay any federal income taxes.
Going down through the worksheet with a couple whose only income was social security and their combined benefit was $64,000 for the year: Social Security Taxation - IRS Publication 915
1 Total Social Security benefit $64,000
2 One-half of line #1 $32,000
3 Adjusted Gross Income items (without 'adjustments') $0
4 Add back tax-free interest $0
5 Add lines 2,3 and 4 $32,000
6 Adjustments (deductible IRA contributions) $0
7 Subtract line 6 from line 5 $32,000
8 MAGI base amount $32,000
9 Subtract base amount (line 8 from line 7) $0
10 Enter factor based on filing status $12,000
11 Subtract 10 from 9 (min = 0) $0
12 Enter the smaller of line 9 or line 10 $0
13 Enter one-half of line 12 $0
14 Enter the smaller of line 2 and line 13 $0
15 Multiply line 11 by 85% (min = 0) $0
16 Add lines 14 and 15 $0
17 Multiply line 1 by 85% $54,400
18 Enter the smaller of line 16 or 17 $0 Taxable Social Security benefit $0
Percent of Social Security benefit subject to taxation 0%
Estimated taxes due $0
Based on the worksheet provided in the most recent IRS Publication 915, your Social Security benefit(s) of $64,000 will be 0% taxable increasing your taxable income by $0 and creating a federal income tax liability of $0.
Now let's compare that with a couple who opted to take social security at FRA receiving $34,000 in benefits but taking $34,000 in IRA distributions for a total income of $66,000 or $2,000 more than the couple above receiving only social security.
Social Security Taxation - IRS Publication 915
1 Total Social Security benefit $34,000
2 One-half of line #1 $17,000
3 Adjusted Gross Income items (without 'adjustments') $32,000
4 Add back tax-free interest $0
5 Add lines 2,3 and 4 $49,000
6 Adjustments (deductible IRA contributions) $0
7 Subtract line 6 from line 5 $49,000
8 MAGI base amount $32,000
9 Subtract base amount (line 8 from line 7) $17,000
10 Enter factor based on filing status $12,000
11 Subtract 10 from 9 (min = 0) $5,000
12 Enter the smaller of line 9 or line 10 $12,000
13 Enter one-half of line 12 $6,000
14 Enter the smaller of line 2 and line 13 $6,000
15 Multiply line 11 by 85% (min = 0) $4,250
16 Add lines 14 and 15 $10,250
17 Multiply line 1 by 85% $28,900
18 Enter the smaller of line 16 or 17 $10,250 Taxable Social Security benefit $10,250 Percent of Social Security benefit subject to taxation 30% Estimated taxes due $2,562
And something to remember, that $2,562 is tax only on their social security and there will be additional taxes on the IRA distributions they take. I dunno but I could see a $5,000 to $7,000 federal income tax bill on their total income. And then there's state on top of it. Most states, like the one where I live, exempt all social security income from state income taxes regardless of the amount.
Getting $2,000 more yet receiving less, go figure.
This is why I want to wait to age 70 to take mine even if it means digging a bit into my IRA if I have to.
Paging Mr. Mathjack, can you go over these numbers for me and make sure I am right?
If a couple together only receives a combined $64,000 in social security benefits they don't pay any federal income taxes.
Going down through the worksheet with a couple whose only income was social security and their combined benefit was $64,000 for the year: Social Security Taxation - IRS Publication 915
1 Total Social Security benefit $64,000
2 One-half of line #1 $32,000
3 Adjusted Gross Income items (without 'adjustments') $0
4 Add back tax-free interest $0
5 Add lines 2,3 and 4 $32,000
6 Adjustments (deductible IRA contributions) $0
7 Subtract line 6 from line 5 $32,000
8 MAGI base amount $32,000
9 Subtract base amount (line 8 from line 7) $0
10 Enter factor based on filing status $12,000
11 Subtract 10 from 9 (min = 0) $0
12 Enter the smaller of line 9 or line 10 $0
13 Enter one-half of line 12 $0
14 Enter the smaller of line 2 and line 13 $0
15 Multiply line 11 by 85% (min = 0) $0
16 Add lines 14 and 15 $0
17 Multiply line 1 by 85% $54,400
18 Enter the smaller of line 16 or 17 $0 Taxable Social Security benefit $0
Percent of Social Security benefit subject to taxation 0%
Estimated taxes due $0
Based on the worksheet provided in the most recent IRS Publication 915, your Social Security benefit(s) of $64,000 will be 0% taxable increasing your taxable income by $0 and creating a federal income tax liability of $0.
Now let's compare that with a couple who opted to take social security at FRA receiving $34,000 in benefits but taking $34,000 in IRA distributions for a total income of $66,000 or $2,000 more than the couple above receiving only social security.
Social Security Taxation - IRS Publication 915
1 Total Social Security benefit $34,000
2 One-half of line #1 $17,000
3 Adjusted Gross Income items (without 'adjustments') $32,000
4 Add back tax-free interest $0
5 Add lines 2,3 and 4 $49,000
6 Adjustments (deductible IRA contributions) $0
7 Subtract line 6 from line 5 $49,000
8 MAGI base amount $32,000
9 Subtract base amount (line 8 from line 7) $17,000
10 Enter factor based on filing status $12,000
11 Subtract 10 from 9 (min = 0) $5,000
12 Enter the smaller of line 9 or line 10 $12,000
13 Enter one-half of line 12 $6,000
14 Enter the smaller of line 2 and line 13 $6,000
15 Multiply line 11 by 85% (min = 0) $4,250
16 Add lines 14 and 15 $10,250
17 Multiply line 1 by 85% $28,900
18 Enter the smaller of line 16 or 17 $10,250 Taxable Social Security benefit $10,250 Percent of Social Security benefit subject to taxation 30% Estimated taxes due $2,562
And something to remember, that $2,562 is tax only on their social security and there will be additional taxes on the IRA distributions they take. I dunno but I could see a $5,000 to $7,000 federal income tax bill on their total income. And then there's state on top of it. Most states, like the one where I live, exempt all social security income from state income taxes regardless of the amount.
Getting $2,000 more yet receiving less, go figure.
This is why I want to wait to age 70 to take mine even if it means digging a bit into my IRA if I have to.
Paging Mr. Mathjack, can you go over these numbers for me and make sure I am right?
Thank you.
Numbers are OK except the comment in red. The $2562 is their TOTAL tax. If you plug these numbers into any 1040 calculator, you'll see that the SS tax portion of the $2562 is about 30% of the $34000 SS benefit @ the 15% bracket rate = $1537 . It is still more than the first scenario.
FWIW, my own situation results in roughly the same numbers
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