Hey guys, Mike Frontera here, back with another Retirement Theory video. Social Security. We like it. We love it. We want some more of it.
We've paid into that FICA system for years and years and decades, and now when we get our Social Security benefits, we get to pay tax on those benefits again. Hardly seems fair, right?
So how do we get those Social Security benefits in our hands without having the government take a second bite of the apple and tax those benefits? So, we talked in the past about this notion of provisional income. So, by gaining control over this provisional income we can help bring our benefits from being up to 85% taxable all the way down to being completely tax free. So how do we do that?
Well, let's take a look at an example. All right, so we've got our old pals, Jerry and Ginny over here and they are each getting $2000 a month in Social Security benefits, so $4000 a month total. They're also taking $60,000 each year from their IRA.
Couple things I want to point out here. The first is that their marginal tax rate is just 12%. However, you'll also notice that out of their Social Security benefits of $48,000, $40,000 of those are considered taxable income.
So let's see what happens when we’ve reduced the amount of money that we have coming from their IRA's. OK, now Jerry and Ginny have only taken $40,000 of IRA withdrawals instead of $60,000. They're still in that 12% marginal tax rate, but now out of their $48,000 of Social Security benefits, only $23,000 are considered taxable income.
OK, now we've pushed Jerry and Ginny to the extreme. We're only taking $8000 of IRA benefits, and we still have that same $4000 a month of Social Security. But now none of them are considered taxable income.
OK, so how does Jerry and Ginny go about reducing the taxes on those Social Security benefits? Well, the key, like almost everything else, is planning ahead. Now remember, we can delay Social Security benefits until age 70. We can also delay our required withdrawals from our IRA's until 73, or 75 if you're born in 1960 or later.
So, during these years, does it make sense to accelerate some additional income that you might need in later years in order to receive some of those Social Security benefits tax free?
During those earlier retirement years, we can think about things like Roth conversions or accelerating IRA withdrawals or realizing capital gains. Especially if we find ourselves in one of the lower income tax brackets, we can really leverage that extra income even if we don't need it, but realizing it in those earlier years so that when Social Security comes around, we're able to get those benefits tax free or less taxed.
So do you have questions for me? Let me know. Come visit me at www. retirementtheory.com or send me an e-mail at mike@retirementtheory. com.