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gurdison

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Taxes on Social Security Payments

August 19, 2003

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From my knowledge of the tax laws it seems like the way to reduce these taxes is to reduce other income which doesn't seem to be an acceptable alternative, but maybe that is just me...The only thing that occurred to me that it was going to be a thinly veiled sales pitch for an annuity or something.


It may seem counter intuitive to many retirees, but having your SS payments taxed is really a good thing. It means that you have a good alternate stream of income in your retirement. You are much better off than someone who has only their SS as income no matter how nice it may feel to complain.

The problem with all of these slimy annuity salesmen is that they can read people, especially retirees, like a book. They know what buttons to push as well as what fears and concerns to tap into. Annuities by far produce the largest fees and commissions for those who sell them. They are usually inappropriate for most of the people who end up buying them (with the worst cases being those who get talked into buying one within an IRA). Of course they are very easy products to sell because the seller is very good at misdirecting the buyer. The buyers do not help themselves because they often put the cart in front of the horse.

I can remember several "discussions" I had with my father years ago while helping him out with his taxes. I realized he kept a very large amount of funds sitting in his non-interest bearing checking account. At the same time he had a miniscule amount of funds sitting in his savings account. When I pointed out the clear illogic of his action, his defense was that:

A) he did not want to pay any more taxes to the government than he had to.
B) he did not want more of his SS payments to become taxable or to get kicked up to a higher tax bracket.


How does one combat that way of thinking without popping a vein in their head? I calculated that he would keep at least .80 from each additional dollar earned. He was in the 15% bracket plus another couple of percent for state income tax. Some of his SS was already taxable, so he was essentially throwing his money away. At the time savings accounts were paying over 5% and ST CDs were even higher. None of my patient reasoning ever led him to change his ways. It may not be scientific, but I have since heard countless similar stories from those who have enlightened me on their own encounters with their older relatives.

It becomes easy to see why these pitches are so successful. The focus is on the possibility of lowering ones tax bill or preventing SS income from being taxed. The fee structure or even the appropriateness of the investment often gets lost in the shuffle.


BRG


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