Social Security benefits can make up a substantial amount of income in retirement, so it’s smart to ensure you’re maximizing your monthly payments.
The amount you receive in benefits is largely dependent on your earnings throughout your career and the age you file for Social Security. However, there are a few other factors that could reduce the size of your checks, and if you’re not prepared for them, you could receive less than you think.
1. State taxes
Even in retirement, you may still be subject to income taxes. In some states, Social Security benefits are considered income and are therefore subject to state taxes.
Fortunately, 38 states do not tax Social Security. The 12 that do are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. Up until recently, North Dakota also taxed benefits. As of 2021, though, Social Security is exempt from the state’s income tax.
If you live in a state that taxes benefits, there’s not much you can do to avoid it. But by preparing for this expense, you can avoid any tax surprises in retirement.
2. Federal taxes
In addition to state taxes, you could owe federal taxes on your benefits as well. Whether or not your benefits are subject to federal taxes will depend on a figure called your “combined income.”
Your combined income is your adjusted gross income (such as 401(k) withdrawals or money from a pension) plus half of your annual Social Security benefit amount. If your combined income is higher than $25,000 per year (or $32,000 per year for married couples filing taxes jointly), you’ll owe federal taxes on a portion of your benefits.
The good news is that no matter how much you’re earning, you won’t pay taxes on more than 85% of your benefit amount. In addition, Roth IRA withdrawals do not count toward your combined income. The more of your retirement income that comes from a Roth IRA, then, the lower your tax bill will be.
3. Unpaid debt
In some cases, a portion of your benefits can be garnished if you have a significant amount of unpaid debt.
If you owe federal taxes, for example, the Department of the Treasury can withhold up to 15% of your benefits until you repay your debt. Your benefits could also be garnished over unpaid child support, alimony, or restitution.
4. Earning too much
While many people choose to retire and claim benefits at the same time, you can continue working even after filing for Social Security. However, depending on your age and income, your benefits could be reduced if you continue to work.
If you won’t reach your full retirement age (FRA) this year, your benefits will be reduced by $1 for every $2 you earn over $19,560 per year. So, for example, if you’re earning $25,000 per year, that’s $5,440 over the limit. Your benefits would be reduced by $2,720 per year, or roughly $227 per month.
If you will reach your FRA this year, your earnings are subject to a different limit. In this case, your checks will be reduced by $1 for every $3 you earn over $51,960 per year.
Fortunately, these benefit reductions are not permanent. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount, and your checks will no longer be reduced regardless of how much you’re earning.
Maximizing your benefits
In some cases, you may not be able to control whether your benefits are reduced. But that doesn’t mean you can’t prepare. By being aware of how these four factors could affect your Social Security, you can head into retirement ready for anything.
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