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.

Fool contributor Dan Caplinger has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.