This One Retirement Move Could Help You Hold on to More of Your Social Security Check

Social Security is one of the most heavily relied-upon benefits for
seniors today. Many older Americans would not be able to pay their bills
without those monthly checks.

Now because Social Security benefits are earned by paying taxes on wages, you’d
think those benefits would be yours to collect tax-free in retirement. But
that’s not automatically the case. Social Security benefits can be subject to
taxes, and it depends on your income picture.

Choosing the right home for your retirement savings, however, could be your
ticket to avoiding taxes on your Social Security benefits and getting to keep
more of that money for yourself.

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When taxes on Social Security benefits come into play

Social Security benefits are not always subject to taxes. Whether taxes on
benefits apply depends on your provisional income.

Provisional income is calculated as the total of adjusted gross income (AGI),
tax-exempt interest income, and 50% of your annual Social Security benefits. If
you’re single with a provisional income between $25,000 and $34,000, up to 50%
of your Social Security benefits could be taxed. If you’re married filing
jointly with a provisional income between $32,000 and $44,000, the same 50%
threat looms.

Once your provisional income climbs above $34,000 as a single tax-filer, you
could face taxes on up to 85% of your Social Security benefits. And if your
provisional income lands above $44,000 as a married couple filing jointly, up to
85% of your Social Security benefits could be subject to taxes as well.

If these thresholds seem very low, it’s because they were established decades
ago and have not been lifted to account for inflation. That’s intentional,
because part of the way Social Security gets funded is taxes on benefits.
Payroll tax revenue is the program’s primary income source, but taxes on
benefits help, too.

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Withdrawals from retirement savings could push you over the edge

Not everyone enters retirement with money in a retirement savings account. But
if you do have savings, withdrawals from a traditional IRA or 401(k) count as
taxable income. That means they’re counted as part of your provisional income.
And they could push you to the point where your Social Security benefits become
taxable.

Furthermore, once required minimum distributions (RMDs) start, you’ll be forced
to take money out of a traditional IRA or 401(k) and pay taxes on it. That means
you may end up with a higher provisional income even if you don’t need those
forced withdrawals.

A Roth IRA could spare you from having your benefits taxed

Withdrawals from a traditional IRA or 401(k) count toward provisional income.
But withdrawals from a Roth IRA do not. That’s why saving for retirement in a
Roth IRA could be your ticket to avoiding taxes on your monthly Social Security
checks.

With a Roth IRA, you contribute to your retirement savings on an
after-tax basis. This is different from a traditional IRA or 401(k), where
contributions are made on a pre-tax basis.

But in exchange, a Roth IRA gives you tax-free gains and tax-free withdrawals.
And if you have a Roth IRA, you also won’t be forced to take RMDs in retirement,
which gives you more flexibility.

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A Roth IRA isn’t right for everyone

While Roth IRAs offer plenty of benefits, and they could be your ticket to
keeping more of your Social Security checks, they aren’t necessarily the right
retirement account for everyone.

For one thing, a Roth IRA makes sense if you expect to be in a higher tax
bracket in retirement than you’re in now. But if the opposite is true, and
you’re a high earner, a Roth IRA might cause you to pay more taxes than you’d
otherwise have to on your savings.

Furthermore, Roth IRAs offer benefits from an estate planning standpoint. People
who inherit Roth IRAs can take withdrawals tax-free. But if you don’t have
children and aren’t concerned with estate planning, that’s not a compelling
reason to choose a Roth IRA.

Finally, if you intend to be very charitable in retirement, a Roth IRA may not
fit your plans. With a traditional IRA, qualified charitable distributions
(QCDs) let you donate money to charities directly and avoid being taxed on your
money while satisfying RMDs. If you like the idea of donating your savings, it
doesn’t pay to choose a Roth IRA.

Bottom line

Seniors who are living on just
Social Security generally do not have to worry about having their benefits
taxed. But when you start to introduce other income sources, that’s when taxes
on benefits can start to become a threat.

Saving for retirement in a Roth IRA could help you avoid having your Social
Security benefits taxed. But you shouldn’t necessarily limit yourself to a Roth
IRA if it doesn’t otherwise suit your financial situation.

Even if you end up with retirement savings in a traditional IRA or 401(k) plan,
there may be other steps you can take to avoid paying taxes on your Social
Security. It pays to work with a financial advisor or tax professional to
explore your options if your goal is to keep as much of your Social Security as
possible.

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