Many retirees are surprised to learn that, above a certain income threshold, Social Security can be subject to taxation. Here are strategies to consider.
For many retirees, Social Security benefits are a crucial component of their retirement income strategy. However, many Americans are surprised to learn that some of that income can be taxed. If you’re currently receiving Social Security benefits or plan to start soon, make sure you understand how Social Security could be taxed.
Generally, your Social Security is taxed when your income is more than $25,000 per year, including income from investments held in retirement accounts such as traditional 401(k)s and IRAs. If Social Security is your only source of income, you likely won’t pay any taxes on it. However, if you’re receiving income from investments, a part-time job, or other sources, there’s a good chance you’ll have to pay taxes on your Social Security income.
Regardless of your total income, the maximum taxable portion of your Social Security benefits will not exceed 85% under the current tax codes.
If your benefits are indeed subject to taxation, you can consider three key strategies to potentially reduce the tax implications:
Let’s look at how to determine if your Social Security income will be taxed, plus a few ideas to help reduce your taxable income in retirement.
To calculate your taxable Social Security benefit, first determine your adjusted gross income (AGI), which is your total taxable income. This might include money you make from:
Next, subtract any tax deductions. The result is your AGI. Then, add two components to that AGI:
This total is your “combined income.” If your combined income is more than $34,000 for singles or $44,000 for couples, up to 85% of your Social Security income may be taxed.
Social Security income is taxed at a lower rate than income from other sources, such as traditional retirement accounts. So you may want to consider the following strategies to help reduce your income from those retirement accounts so a greater portion of your income is derived from Social Security.
Social Security taxes may come as a surprise to many retirees, but there are several effective ways to reduce these taxes. Examine how all your income sources might impact your tax rate, and then consider your available strategies for getting the most out of your retirement income.
TD Ameritrade does not provide tax advice. You should consult with a tax professional regarding your specific circumstances.
Consider building a future with fixed-income products.
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. May be worth less than the original cost upon redemption.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2020 TD Ameritrade.