Avoiding the Social Security Tax Trap

Keystone Financial Group |

Retirees face multiple income tax traps, and the fact is that many retired taxpayers will see a portion of their Social Security income make its way onto the taxable income line of their 1040s.

Those who convert their traditional IRAs to Roth IRAs are especially susceptible to this situation. If you happen to exceed the funding limit, the extra income pushes you beyond the income threshold level requiring you to pay tax on Social Security income that you thought was tax-free.

Additionally, a shift in marital status can place you in a higher tax bracket, sadly, even if this is due to the death of a spouse.

Lower- and middle-income retirees get hit by the so-called tax torpedo, as rising income causes their Social Security benefits to be taxed.

The table below shows how to determine how much of your Social Security benefit may be taxable:(1)

Social Security taxes table

You will also want to keep in mind that, after a one-year hiatus, RMDs will be back when filing 2021 taxes, increasing your income. Thus, it would pay to start thinking about avoiding future RMD-induced tax triggers now.

Options for Lowering Your Social Security Taxes

  • Seniors can take steps to avoid or minimize tax traps. These may include delaying spending on large purchases from one year to the next and judiciously tapping tax-advantaged after-tax accounts (such as cash value life insurance or Roth IRAs) to lower taxable income.
  • Another option would be taking RMDs as a qualified charitable distribution if you don’t need the income. That way, it won’t trigger higher taxes or higher future Medicare premiums.(2)
  • Retirees in their 60s often pay little or no taxes before they begin taking Social Security. Many are living off after-tax savings, Roth IRA accounts, or inherited money. The standard advice is to spend this money before tapping tax-deferred accounts. Then, take advantage of a lower tax bracket to convert money in tax-deferred accounts to Roth IRAs. 
  • Generally, annuities become taxable income when they’re taken as distributions, depending on the account type. Virtually any investor who isn’t spending all the interest paid from a CD or other taxable instrument can benefit from moving at least a portion of his or her assets into a tax-deferred or tax-advantaged investment or account.
  • Another possible remedy could be to simply work a little less in your later years, especially if you’re at or near the threshold of having your benefits taxed.

There are many rules concerning the taxation of income during retirement, and it’s crucial to fully understand your situation to find ways to minimize the impact on your retirement income and Social Security benefit. As financial professionals, we can help you plan now to protect the retirement nest egg you have worked so hard to build. Call us today at 614-300-9501, and let’s discuss your options!



1) https://www.investopedia.com/articles/pf/08/social-security-tax.asp

2) https://www.barrons.com/articles/retirees-beware-these-tax-traps-on-social-security-and-medicare-51593707401



This document is for educational purposes only and should not be construed as legal or tax advice. One should consult a legal or tax professional regarding their own personal situation. Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products offered by an insurance company. They do not refer in any way to securities or investment advisory products. The firm providing this document is not affiliated with the Social Security Administration or any other government entity.