Tag Archives: Social Security

How Are Your Social Security Benefits Taxed?

How Are Your Social Security Benefits Taxed?

Understanding Provisional Income

An important factor when creating your retirement income plan is deciding when to claim your Social Security benefits. However, something that is often overlooked is the potential taxation of your benefits if your income exceeds certain annual limits.

These annual limits are based on “provisional income” which is adjusted gross income​ + tax-exempt interest (which could be interest from municipal bonds and savings bonds)​ + 50% of social Security benefits.

“Provisional Income” Formula Used by the IRS:​

Adjusted gross income​ + Tax-exempt interest​ + 50% of Social Security benefits

If your “provisional income” exceeds the levels shown below, you may owe federal income tax on up to 50 percent or 85 percent of your Social Security benefits. The levels are different depending on your tax filing status, but they are not adjusted for inflation.

Example of the of Taxability Social Security Benefits

For example, a married couple (filing jointly) has $1,000 interest income, $10,000 dividend income, and $4,000 tax-free interest; $30,000 of IRA income; and $30,000 annual Social Security benefits (of which only 50 percent, or $15,000, is used in the formula for provisional income to determine the taxability of Social Security benefits) for a total annual income of $75,000.

Their resulting provisional income is $60,000, which is over the $44,000 income threshold for joint filers, and they could owe taxes on up to 85 percent of their Social Security benefits*. 

The Benefits of Tax-Free Income

Having a source of tax-free assets such as a Roth IRA might help you avoid taxes on your Social Security benefits. Unlike tax-exempt bond interest, qualified Roth IRA distributions are not included in the formula for taxability of Social Security benefits.

This is because you don’t receive an income tax deduction on any contributions made to a Roth IRA. Also, there are no required minimum distributions (RMDs) from a Roth IRA throughout the lifetime of the original owner.

This is unlike traditional IRAs and employer-sponsored retirement plans where you must begin taking required minimum distributions once you reach age 72. These taxable distributions may increase your annual income and could affect the taxability ​of your Social Security benefits once they begin.

An Example of How a Roth IRA Can Reduce the Taxability of Your Social Security Benefits

Going back to the previous example we can illustrate how the use of a Roth IRA may help reduce (and possibly avoid) taxes on Social Security benefits. The only difference to their income in this new scenario is the couple has tax-free income from a Roth IRA instead of taxable income from a traditional IRA.

As a result, their Social Security benefits will not be taxed. Their Roth IRA income is excluded from the formula, and thus their provisional income is only $30,000, which is below the $32,000 threshold for taxing benefits*.

Once you understand how your Social Security benefits are taxed, you can begin exploring opportunities to potentially reduce the taxes you pay. Depending on your income and mix of assets, you may have the ability to better manage your tax liability in retirement.  

*These hypothetical examples are used for illustrative purposes only. Actual results will vary.

Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.

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Four Undervalued Retirement Strategies

The Challenges of Reaching the Average Person in Sports Nutrition

In the field of sports nutrition, they face two challenges when developing new products.  

  1. Finding ingredients that work.  
  1. Packaging those ingredients into a product that the consumers understand and are willing to buy.  

It is possible for consumers to read the latest scientific research and implement their findings by purchasing the ingredients online. The average consumer is not likely to do this because the individual ingredients are unflavored and relatively expensive.

This results in a limited audience for these ingredients because their benefit does not justify the time and effort required to study and source them. 

This means new ingredients are not widely utilized until they can be packaged in a way that is appealing and cost-effective to the average consumer. Sports nutrition companies must create a product around the new ingredient and communicate the benefits in a way the average person understands.

They also must ensure their product is effective, reasonably priced, and tastes good to maintain their credibility as a brand.  

The Challenges of Reaching the Average Person Planning for Retirement

Something similar happens in retirement planning. There are strategies that can be beneficial to your retirement plan but are not widely adopted. This can be due to a lack of understanding of the benefits or an uncertainty of how to implement them. 

Unless they are working with a trusted advisor who can explain these concepts in a way they understand, the average retiree will forgo these strategies. An advisor can show how these strategies are combined into an overarching retirement plan and allows them to make informed decisions after seeing the potential benefits.  

The whole is greater than the sum of its parts


Four Undervalued Retirement Planning Strategies 

1. Global Diversification

A globally diversified portfolio is often unappealing given the recent outperformance in the US stock market. This trend could continue, but there is benefit in looking to invest in companies outside of the United States.  

2. Delaying Social Security

For those who have the luxury to postpone claiming their social security, the potential benefit of their financial plan can be massive. Often how it is framed can lead to individuals want to claim it sooner rather than later.  

3. Long-Term Care (LTC) Insurance

There is a high probability you or your partner may need some form of LTC. But people are often hesitant to buy something they may not need or use.

4. Estate Planning

Ensuring your affairs are in order. This may seem obvious, but many people postpone estate planning because they do not want to come to terms with things. It is an advisor’s job to help them through this process.  

These items may not be appealing but can be beneficial when incorporated into your retirement plan. Even if you decide against using these strategies it would be prudent to explore their potential benefits. Following a financial planning process ensures you review your earlier decisions and determine if your position in any area has changed.

Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.

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When Should You Claim Social Security?

Social Security’s Role in Your Retirement

For many years Social Security benefits were said to be one leg of a three-legged stool consisting of Social Security, private pensions, and personal savings. With private pensions becoming less common, many people enter retirement with a stool that only has two legs.

Now more than ever Social Security benefits are the foundation upon which individuals can build additional retirement security through personal savings and investments. The percentage of retirement expenses of Social Security covers is not a fixed number and is determined by the age you begin taking benefits.

Deciding When to Claim Social Security

One of the most important decisions you need to make when building your retirement income plan is when to claim Social Security. The benefit you receive is based on an average of the highest 35 years of earnings in which you paid Social Security payroll taxes, as well as on the age when you claim benefits. 

Married couples have additional claiming options, including spousal benefits and survivor benefits.

Your benefit would be reduced or enhanced based on claiming Social Security at age 62 (the earliest age) or waiting until age 70. 

You can match up your year of birth to see what your full retirement age (FRA) is and the effect of claiming early or delaying claiming has on your benefit.

Source:  Social Security Administration

Not only does Social Security provide longevity protection, because benefits continue throughout your lifetime, it also provides some inflation protection and spousal protection.

For example, let’s assume you have a hypothetical $2,000 primary insurance amount (PIA) and were born in 1960 making your full retirement age 67. The chart below illustrates the change in benefit amount based on the age you decide the claim. In this example, the difference in annual benefits received at starting at age 62 and 70 is nearly $13,000 per year.

If you do choose to delay claiming your Social Security benefit to increase your monthly benefit, you must use existing savings to cover current expenses and “bridge the gap” between when you retire and when you begin taking benefits.

In effect, you are “buying” an annuity from Social Security with these savings and taking advantage of the best deal around, especially in today’s low interest-rate environment. 

Not everyone has the luxury to be able to afford to delay receiving social security benefits, but for those who can, it is a strategy you should strongly consider. Waiting to claim Social Security significantly will affect your own lifetime benefits, and could also impact surviving spouse benefits as well. Deciding when to claim your Social Security benefit is a nuanced decision with serious implications to your retirement income plan.

Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.

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Is Social Security Going to Run Out?

Every year the Social Security Board of Trustees releases a report on the status of the Old Age and Survivors Insurance (OASI) trust, which pays benefits to retired workers and the survivors of deceased workers. According the 2020 report, 2021 with be the first year of negative cash outflows, meaning benefits paid will be greater than the tax revenues and interest income from the assets in the trust. These outflows will begin to exhaust the trusts reserves until 2034 when the OASI Trust runs out of money.  

What happens to the benefits paid by the programs if/when the trust funds are actually depleted? The answer is they can continue paying as much of the benefits as they can manage, simply using the ongoing tax revenues that are still being collected. And how much is that? 74%! This is a big contrast to the assumption that “bankrupt” actually means ALL benefits will cease and a drop-off 100% of the benefits instead of 24%. 

*Note – The impact of COVID 19 and the Payroll Tax “Holiday” were not included in the 2020 Trustee report. Both of these events will likely negatively affect the funding of the OASI Trust and likely accelerate its depletion. 

How did this happen?

  • Lower birthrates and lower immigration have reduced the numbers of workers paying into the program
  • People are living longer in retirement and are receiving benefits for longer.
  • Congress has been reluctant to introduce meaningful policy reform to address this issue
  • Low interest rates have reduced the income generated on the trust’s assets

Possible solutions

Increase taxes

  • Increasing taxes would raise the revenue going to fund benefits being paid. This could be done by raising the payroll tax rate, eliminating the payroll tax earning cap, or increasing the taxes on Social Security benefits.

Cut benefits

  • Reducing benefits would decrease the money flowing out of the system. This could be achieved by increasing the full retirement age, change how the cost-of-living-adjustment (COLA) is calculated, or using means-testing to reduce benefits to those with significant retirement assets or benefits.

Implications For Your Retirement

  • If you are already retired you are unlikely to see a change in benefits and any cuts will likely only occur to people who retire after reserves are exhausted.
  • If you are near retirement, you must decide if delaying social security is appropriate and consider the impact of potential tax changes.
  • If retirement is far away you can model the worst-case scenario of a 24% reduction in benefits and stay up to date on changes to the program as they occur.

Although there are pending issues that need to addressed, Social Security may change, but will almost certainly be there when you retire. MOST of the benefits paid out are funded from current tax revenues from current workers and the purpose of the OASI trust is to pay the difference. With this knowledge one must plan according and make decisions based on current information and be to adapt as new information arises.

If you have any questions, please send us an email at info@westernreservecm.com

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The Guide to Accessing Your “My Social Security” Account Online

Accessing your My Social Security Account Online

The Social Security Administration stopped mailing annual statements in 2011. Currently a Social Security statement gets mailed only to workers age 60 and over who aren’t receiving Social Security benefits and do not have a My Social Security account yet. These statements are mailed three months prior to your birthday. 

Why register?  

By creating your My Social Security account, you will have access to the following things: 

  1. Your Social Security statements. 
  2. Your estimated future benefits.
    • Your benefits are reported in today’s dollars meaning it’s what you collect if you were that age today. The actual amount will be in future dollars that are inflation adjusted. 
  3. Ability to review the accuracy of your Earnings Record.  
    • Social Security base is your future benefits off of your lifetime earnings, top 35 years. 
  4. Request a replacement Social Security card. 
  5. Prevent fraud by keeping track of your records and identifying suspicious activity. Stay on top of such activity and deter others from claiming your account. 

Once you start receiving benefits your My Social Security account will allow you to do the following: 

  1. Get instant proof of your benefits
  2. Change your address and phone number
  3. Start or change your direct deposit information
  4. Request a replacement Medicare card
  5. Get a copy of your SSA-1099 

In order to create an account, you must meet the following requirements: 

  1. Be at least 18 years of age
  2. Have a Social Security number
  3. Have a valid US mailing address
  4. An email address  

Here is a helpful guide the Social Security Administration has created. 

On this site you can: 

  • See when you full retirement age is  
  • Claim your account so that no one else can 
  • Verify your earnings history has been reported correctly.  

Once you have created your account, we recommend you logon at least annually to verify your earnings history has been reported correctly.  Also, we recommend that you have any children or grandchildren over the age of 18 register for their account, as well. 

Social Security will likely make up only a part of the income you will need to replace in retirement. The remaining gap must be filled with your investment portfolio, pension benefits, annuities, and other non-retirement assets that produce income for you. Understanding Social Security and the benefits you are expected to receive is the first step in creating a solid retirement plan

If you have any questions, feel free to reach out to us at info@westernreservecm.com

Social Security Administration contact information: 



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