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Pocket More of Your Social Security Benefits With This 1 Clever Move

By Christy Bieber – Nov 6, 2021 at 11:28AM

Key Points

  • Around half of all retirees lose some of their Social Security benefits.
  • More are at risk of losing some of their money in the future.
  • You could take steps now to prevent your benefits from being reduced.

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The sooner you act, the more of your Social Security benefits will be yours.

Social Security benefits will provide guaranteed lifetime income in your later years, and you want to make the most of it. That's why it can be upsetting to discover that about half of all retirees are currently losing some of their Social Security benefits -- and more seniors will in the future.

Why is this happening? Because the federal government taxes benefits once your income reaches a certain threshold. While this tax only hit a small portion of retirees originally, the income thresholds at which taxes kick in aren't adjusted for inflation, so a growing number of seniors find themselves with their checks reduced due to IRS bills.

The good news is, if you haven't yet retired and aren't close to doing so, there's a simple move you can make throughout your career to ensure you bring home more of your benefits -- rather than giving a piece of them to the government. Here's what it is. 

Two older adults using calculator and looking at papers.

Image source: Getty Images.

This move can mean keeping more of your retirement income

If you want to make sure you don't end up losing any of your Social Security benefits to the IRS, one of the best options available to you is to choose to invest your retirement savings in Roth accounts instead of traditional ones.

This is because when your income is calculated for the purposes of determining if you must pay federal taxes on Social Security benefits, not all income counts. The income that goes into this formula includes:

  • Half the amount of your Social Security benefits
  • All taxable income
  • Some limited nontaxable income, such as municipal bond interest

If you invest in a traditional 401(k) or IRA, the distributions you take from it to supplement Social Security are taxable income. In other words, if you end up withdrawing enough from these accounts, it will push you over the threshold at which Social Security becomes taxable.

And, remember, these thresholds aren't very high. Up to 50% of your benefits are subject to tax once your provisional income exceeds $25,000 as a single filer or $32,000 as a married joint filer. And as much as 85% of your benefit will be taxed if your income exceeds $34,000 as a single filer or $44,000 as a married joint filer. If you're a long way from retiring, it's very likely that your income will be above these limits. 

Distributions from a Roth 401(k) or Roth IRA, on the other hand, aren't taxable income and do not count when provisional income is calculated. So, you can withdraw as much as you'd like from them without any fears that you'll see a reduction in Social Security checks due to IRS bills. Since you won't have to worry about taxes on your distributions or on your retirement benefits from the Social Security Administration, you should have a lot more money available as a senior.

Now, the downside of Roths is that you can't take a deduction for contributions in the year you invest in the accounts -- unlike with traditional 401(k) or IRA plans. But, for many people, it's worth forgoing the upfront tax deduction now to avoid taxes as a senior and keep more of your Social Security checks.  If you want to avoid worrying about taxes as a retiree, you may be one of those people. So, starting to save in a Roth account today could be one of the smartest moves you make.

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