3 Ways To Avoid Paying Taxes On Your Social Security Benefits

When you pay into Social Security your whole life, you expect monthly benefits in retirement. You may also expect to keep those benefits in full. But spoiler alert — that may not end up happening.

Depending on your total retirement income, you may find that your Social Security benefits are subject to taxes. Worse yet, the thresholds at which taxes on benefits apply are almost ridiculously low.

Social Security benefit taxation hinges on combined income. That’s your adjusted gross income, tax-free interest income (like what municipal bonds pay), and 50% of your Social Security income for the year totaled up.

If your combined income is more than $25,000 as a single tax filer or above $32,000 as a joint tax filer, you risk taxes on your Social Security benefits. These limits were set decades ago and have not been adjusted for inflation. For this reason, it’s very easy to fall into the category of being liable for taxes on benefits.

However, there may be a way to avoid that. Here are a few options that could help you ditch taxes on Social Security benefits.

1. Do a Roth conversion before you claim Social Security

Withdrawals from a traditional retirement account count toward your adjusted gross income, which means they’re part of your combined income. But Roth withdrawals aren’t counted in that formula.

If you want to avoid being taxed on Social Security, do a Roth conversion so you’re not eventually forced into required minimum distributions (RMDs) from your retirement savings. RMDs could push you above the aforementioned combined income limits.

2. Withdraw from Roth savings after claiming Social Security

Because Roth withdrawals aren’t included in the combined income formula, don’t limit yourself in that regard. You could take $150,000 out of your Roth IRA in a single year, and as long as the rest of your combined income formula puts you below the above-noted limits, you shouldn’t have to pay taxes on your Social Security benefits.

3. Use QCDs once you start having to take RMDs

You may not be able to move all of your retirement savings into a Roth. And once RMDs come into the picture, those mandatory withdrawals could drive your combined income up.

But if you use qualified charitable distributions (QCDs) to satisfy your RMDs, those withdrawals won’t count toward your combined income. A QCD lets you send money from a traditional IRA to a qualifying charity directly.

Don’t assume you’re doomed

The reason many people really hate paying taxes on their Social Security benefits in retirement is that it feels like being doubled taxed. Your wages are taxed during your working years to fund Social Security, but you get the promise of benefits in retirement. To then have those benefits taxed feels like a double whammy.

Some might even say it feels illegal. But unfortunately, that’s the law.

However, it’s not a given that you’ll have to pay taxes on your Social Security benefits even if you have a generous retirement income. The key is to know what triggers those taxes and what you can do to get out of them.