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Will My Social Security Benefit Be Reduced Or Taxed? [Flowchart]

Presented by Sean Cook, CFP®, AIF®

Jan 30, 2019 12:29:50 PM

Social Security is a significant and welcome guaranteed income source, even for affluent retirees. Whether your benefit is reduced or taxed depends mainly on five items:

  1. Your Age
  2. Your FRA (Full Retirement Age)
  3. Marital Status
  4. Your Annual Income
  5. If you are receiving a "non-covered pension" or not.

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As you look towards retirement, claiming your social security can be one of the more important and complicated decisions, especially if you are or have been married. There are many rules that can have a significant impact on the amount you will receive monthly. 

When planning for lifetime income we aim to help our clients get more with customized claiming strategies that aren’t always obvious. Social Security Administration personnel are not allowed to give specific advice. Also, social security’s calculators don't analyze what strategies give you more money or integrate other income sources.

Before creating an overall income plan just getting an idea of the basic rules about Social Security to avoid a reduction or anticipate tax can be useful.

Below is a flowchart to help answer the common question “Will My Social Security Benefit Be Reduced Or Taxed?” It is updated for 2019 and based on the Social Security Administration’s “Retirement Benefits” guide. It covers common issues related to claiming social security such as:

  • What is your Full Retirement Age (FRA)?
  • Effects of marriage and divorce
  • Implications of collecting before FRA vs. collecting at FRA vs. collecting after FRA
  • Annual income limits
  • Impact if continuing to work
  • How benefits will be taxed

Social Security Benfit Reduction Flowchart will-healthcare-change-as-i-transition-into-retirement-2019.pdf

Let’s consider the example of Nora, who was born in 1958 and is thinking about retirement. She knows from friends that she could start her benefit as early as age 62 and get less, or as late as 70 and get a bigger monthly amount.

Her Full Retirement Age (FRA) is age 66 and 8 months, off of which her benefit amounts are estimated. Nora also sees in the flowchart that 85% of her social security benefit will be taxable, based on what she thinks her total income will be at that time. Perhaps most important, because she was married, Nora sees that she might be eligible for another benefit.

With a better understanding of social security rules, Nora is ready to think about other issues- Can she start a college fund for her new grandchild? Will her health coverage stay the same? What will a week in retirement actually look like?

 

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Topics: Retirement Planning, Financial Planning, Social Security, Tax Planning

    
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