MAXIMIZE your Social Security AND Save on Income Taxes:Submitted by M.K. Byrne & Co. on September 17th, 2017
September 2017 - MAXIMIZE your Social Security AND Save on Income Taxes: After your Full Retirement Age is reached (i.e. Age 65 to 67), your Social Security Benefit will grow annually by 8% for each year that benefits are delayed until Age 70. By delaying benefits, you increase both your annual Social Security benefit and your “tax free” retirement income FOR LIFE as only a maximum of 85% of one’s Social Security benefit is subject to Federal taxation and many states like New York and New Jersey do not tax Social Security at all. With these factors in mind, Social Security is a highly tax efficient form of retirement income and prudent retirement planning generally involves maximizing one’s Social Security.
However, if someone retires at Age 66 and delays their Social Security Benefit, neither employment income nor Social Security income is received which will require the use of one’s savings to fund normal living expenses. This Age 65 to Age 70 period of potentially zero annual income can present a tremendous tax planning opportunity and should be maximized.
First, it can make sense to utilize a Traditional IRA or 401k to fund your living expenses in this Age 65 to Age 70 time frame if you are in low tax brackets and you expect higher future tax rates. Since this Traditional IRA money will eventually be subjected to taxable RMDs at Age 70.5, it is best to receive these distributions in years of low tax rate exposure where the 10% and 15% tax brackets are readily available. Additionally, this low income time period may also be an optimal time to sell a highly appreciated stock at a lower capital gains tax rate or to liquidate a non-qualified variable annuity with a sizable embedded tax gain. Just as taxpayers focus on minimizing realized income in high income years, low income years should also be fully utilized through the recognition of income at unusually low levels of taxation.