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Social Security Benefits: 1 Reason to Wait That Almost No One Knows About

Social Security is essential for millions of Americans trying to make ends meet in retirement, and deciding when you start taking Social Security has huge financial implications for the rest of your life. Choosing to wait to take Social Security increases your monthly benefit, but there's another compelling reason why deferring Social Security can be a smart choice.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at how the taxation of Social Security benefits can make a big impact on your decision of when to take benefits. Because up to 85% of your Social Security benefits can be subject to tax if your income is high enough, retirees need to consider the impact of taking IRA and 401(k) distributions on their taxable income and the resulting impact on how much tax they pay on Social Security benefits. Dan suggests that for some retirees, living on retirement-account income during the early retirement years while holding off on Social Security until later can leave them with more money in total after taking taxes into account.

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Read/Post Comments (20) | Recommend This Article (35)

Comments from our Foolish Readers

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  • Report this Comment On November 28, 2013, at 12:00 PM, fusemann wrote:

    I think this guy is WRONG. IRA distributions are not included in the calculation of taxable social security benifits.the worksheet excludes line 15a income which is where IRA distributions are reported. only earned income, tax free income, and certain preference items are used is calculating "combined income" which is used to determine the amount of SS benifits that are taxable. complicated Yes.

  • Report this Comment On November 28, 2013, at 12:13 PM, mikegalt wrote:

    Social Security is a Ponzi scheme. The money you pay in is not invested for you. The money you get back is tax dollars collected from people who are younger than retirement age and working and paying taxes. Half the country does not work anymore so there is no guarantee the government can and will pay back the money they promised you. In fact the Supreme Court has ruled that the government has no legal obligation to pay back any Social Security benefits. They can default on the whole promise. The yearly SS benefits are suppose to go p with the cost of living but the government changed the way nflation is calculated and left out food and energy prices! Talk about a con-game. When you do get paid benefits you get inflated fiat federal reserve notes. EVen with inflation controlled around 3 % a year which has not always been true in 45 year that you work and pay into SS your money loses 150% of its value. If they just factored in the skyrocketing price of health insurance it would be obvious SS is a coercive deal that pays back very poorly and if you die at an average life expectancy you will never even get your money back dollar for dolar. My advise: Start SS as soon as you can and invest the money someplace where it grows.

  • Report this Comment On November 28, 2013, at 1:59 PM, wtfUsay wrote:

    mikegalt suggested taking social security as soon as you can and investing the difference. That only works for someone making minimum wage because of every 2 dollars one earns over $15k, $1 is taken away from the social security payout. Yea, go ahead and take it early, then have none or very little the following year because it is being paid back to SSA. Mike does not have a clue on how it works.

  • Report this Comment On November 28, 2013, at 3:54 PM, TMFGalagan wrote:

    @fusemann - Thanks for your comment, but you are mistaken about retirement account distributions being included. You're right that if you have nontaxable distributions that only appear on 15a but not on 15b, they aren't included. But amounts on 15b, which include most traditional IRA distributions, are included.

    best,

    dan (TMF Galagan)

  • Report this Comment On November 28, 2013, at 4:05 PM, farmerart wrote:

    I think fuseman is wrong. I went to an on-line tax calculator that is set up to let a person see how much of his/her SS pension payment will be included in taxable income for one's Federal filing. This calculator includes IRA distributions. I have never before heard that IRA distributions are excluded when figuring the "0" "50%" or "85%" level that one's SS income is taxed. Any CPAs out there who could settle this question?

  • Report this Comment On November 28, 2013, at 4:45 PM, NOTvuffett wrote:

    The elephant in the room is we all know that there is no money in Al Gore's infamous "lock box". Well, that is unless you count IOU's, lol.

  • Report this Comment On November 28, 2013, at 5:11 PM, BillDaCat wrote:

    SS is not a ponzi scheme. It does not fit the definition. What it is . is a transfer from current workers to those retired to keep them from living in poverty. It works. It also provides disability to those who become injured or otherwise unable to work.. a HUGE benefit that those who want to steal your SS would rather you forget about. Between the retirement income and the disability insurance, SS provides a huge benefit to our society. If you let the crooks in our government take it from you, you are truly -fools-. It is not broke, it has 2.5 trillion in over payments in it. It has not contributed one cent to the deficit. Even in 20 years, the CURRENT payment s into it would cover 73% of benefit payments.. it needs small adjustments within the next decade or two, it does not need a bunch of crooks trying to dismantle it. While you are young, you think you are going to live forever, you'll never get sick and you will save all you need for your own retirement. Unfortunately, for most people, SS and medicare are Godsends that save them from an old age living in utter poverty,.

  • Report this Comment On November 28, 2013, at 5:14 PM, BillDaCat wrote:

    as for IOUs... Treasury notes (what is held in the SS fund) are good enough for China and the rest of the world to take as US Govt debt.. but not good enough for American workers(We can't trust it but foreigners can???)? So it's ok to steal money from American workers, but not ok to refuse to pay our bills to foreigners.. shame on our Government for even considering cutting SS payments or raising the retirement age when we have paid 2.5 trillion extra into it.. shame on them for trying to rob the working people of this country.

  • Report this Comment On November 28, 2013, at 6:07 PM, jack01 wrote:

    The government t want pay you nothing, when you full retirement, then die next day.

    all money confiscated for these parasites.

  • Report this Comment On November 28, 2013, at 6:37 PM, vulture6468 wrote:

    The taxable portion of IRA distributions are included in Modified Adjusted Gross Income (MAGI) which is used to determine if Social Security benefits are taxable.

    Obtain publication 915 from the IRS and all will be explained. The worksheet (in publication 915) has you add 50% of social security benefits to other income, which includes line 15b of Form 1040. Line 15b is your taxable portion of IRA distributions.

  • Report this Comment On November 28, 2013, at 7:20 PM, cgrover wrote:

    There are early retirees who should do the opposite of what is suggested; namely, take SS early and delay taking 401k or IRA distributions until age 70.5. This is preferable when there are other sources of unearned income and 85% of SS benefits are going to be taxed regardless.

    I prefer increasing the accumulation in retirement accounts rather than increasing SS benefits while depleting retirement accounts.

  • Report this Comment On November 28, 2013, at 7:56 PM, walter17 wrote:

    idk, i'm no expert but aren't contributions to a traditional IRA excluded but distributions taxed, unless it's a Roth IRA which is the opposite.

  • Report this Comment On November 28, 2013, at 9:05 PM, seatest wrote:

    I agree with cgrover. Your after tax benefits may be more if you take the benefits early, before age 70.5 when you need to start taking mandatory distributions. Also I am concerned that with all this talk about means testing "entiltements" that the government may reduce the benefit or increase taxes on future benefits. Each person needs to do their own analysis.

    A ponzi scheme is where income instead of actually being earned from money that is socked away, are paid by a growing population of new investors - that's what ss does. It's intergenerational theft.

    SS was not sold as a redistribution of wealth - that's why roosevelt established the contribution scheme - to make people think they actually earned and were entilted to what they were getting. But in fact it has become a redistribution scheme.

    SS is the only income that is taxed three times. You pay tax in the income which is subject to ss tax, than you pay the ss tax itself, then you pay tax when they pay it back to you.

  • Report this Comment On November 28, 2013, at 10:41 PM, Arill wrote:

    I'm in my 50's and I use the same logic to expect to take SS early. My income won't be much different when I'm 64 vs 70 when it will be low and likely below the 85% threshold. But it will increase when I'm 71 due to minimum IRA withdrawals. By taking SS early, I will lower each year which will give me a better chance to avoid or reduce amount in the 85% threshold.

  • Report this Comment On November 29, 2013, at 2:58 AM, Yoshua wrote:

    What about those on SSDI is it the same?

  • Report this Comment On November 29, 2013, at 7:55 AM, stingray wrote:

    ss going broke tell me how

  • Report this Comment On November 29, 2013, at 8:35 AM, DerAlteJunger wrote:

    Social Security is:

    A – a retirement plan from the Federal Government

    B – an insurance program to provide for basic expenses of people too old to work

    C -- an “intergenerational transfer of wealth” where the working generation pays for the support of the preceding generation of workers, who in turn paid for the generation which preceded them, etc.

    D – a Ponzi scheme, perpetrated by the Federal Government

    E – just another tax you have to pay

    F – 2 of the above

    G – 3 of the above

    H – 4 of the above

    I – all of the above

    J – none of the above

  • Report this Comment On November 29, 2013, at 1:46 PM, fusemann wrote:

    I stand corrected. obviously this is a complex issue and every ones situation is different.we all want to minimize taxes or maximize net income thank congress for making this so difficult.

  • Report this Comment On November 29, 2013, at 3:00 PM, ScottPletcher wrote:

    @seatest: Quite right to be worried about "means testing". "Means" will end up including 401Ks. So, for saving diligently for your retirement outside of the 12.4% you were FORCED to pay into the Soc Sec pyramid (it's more a pyramid than a ponzi), you will be punished by having some/all(?) of your Soc Sec withheld! And congress thanks you for playing their game!

  • Report this Comment On November 29, 2013, at 5:16 PM, SkepikI wrote:

    DAN and FF (Fellow Fools): While the discussion is quite the interesting academic exercise and generally helpful to get all of us to think clearly about the many options for retirement income, it is off the mark.

    As one nearing but not at a decision point (I am 62 and still "working" summat) with many friends in a similar spot, I can tell you the most important consideration on when to take what. And its NOT how to maximize your overall "take" which Dan seems to allude to here.

    The most important thing is to set your own goal and expectation for your retirement. If you want to quit worrying about money, enjoy what you have after working like a crazy person for 60 years, you will get one answer, and likely it means taking more early. Similarly if you want to do risky things like climbing mountains and taunting socialists in Washington DC, while you still have young legs and adrenaline flows, early might serve your purposes. If you want to join a commune, dedicate your assets and life to the guru of your choice, you may want to hold back so when you are abused and fleeced you can still survive on SS... OR if your objective is to die with a full bank account after being placed in a nursing home where the staff steals from the residents by your ungrateful children, you just may wish to take on a maximize benefits over life plan. The first and foremost consideration is to be crystal clear on what's important to you and what your goal in retirement might be.

    After, all, herding Goats in Guatemala is not the expensive proposition that Partying in Palm Springs might be, so it does not need the accumulation of more SS income. The Goats wont care that I decided to take a minimum benefit when my age group qualified.....

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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