The threat of Social Security benefit cuts is very real, especially since the pandemic has completely upended society this year. This is worrisome for those who were counting on Social Security to cover a substantial portion of their retirement savings.
You'll definitely get some money from the program as long as you've worked at least 10 years, but if you want to get as much as you can from Social Security, you must take special care to keep it out of the hands of the IRS. If you don't, you could lose some of those benefits you've worked so hard for. Keep the following three tips in mind if you'd like to avoid this.
1. Wait to claim benefits until you're retired
You may claim Social Security as early as 62, but if you do so while you're still working, you could lose some of your benefits to the Social Security Earnings Test. Those who are younger than their full retirement age (FRA) -- 66 or 67, depending on your birth year -- will lose $1 from their Social Security checks for every $2 they earn over $18,240 in 2020. Those who will reach their FRA in 2020 will lose $1 for every $3 they earn over $48,600 if they hit this amount before their birthday.
This money isn't necessarily all gone forever, though. When you reach your FRA, the government recalculates your checks to include the money it withheld, and your future checks will be larger. But you can avoid all of the extra hoops by just delaying Social Security until you're fully retired.
You could lose some of your benefits permanently if you end up owing taxes on them. The federal government requires individuals with combined incomes exceeding $25,000 and married couples with combined incomes exceeding $32,000 to pay taxes on some of their benefits. Combined income is defined as your adjusted gross income (AGI) plus any nontaxable interest you have and half of your Social Security benefits.
If your income exceeds the above threshold for your tax filing status, you could owe taxes on up to 85% of your Social Security benefits, but that depends on your combined income. Here's a more detailed guide explaining taxes on Social Security benefits to help you figure out what you might owe.
You may be able to avoid Social Security benefit taxes altogether if you just wait to start benefits until you're fully retired and your income is lower. Even if you don't avoid the tax completely, waiting until your income is lower could reduce how much you owe in taxes.
2. Move to a state that doesn't tax Social Security benefits
The federal government isn't the only one that taxes Social Security benefits. Thirteen state governments do, as well. These are Connecticut, Delaware, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. Each state has its own system for determining who owes taxes on Social Security benefits and how much they'll owe, but if you live in any of them, there's a chance you'll lose even more of your Social Security benefits to the government.
Moving can be a big change in retirement, but if you're not especially tied to the state you live in now, it could be a smart way to hold onto more of your Social Security benefits. Of course, you also have to weigh the costs of moving and whether living expenses will be higher in a new state to decide whether this is worth it for you.
3. Use your retirement savings wisely
You don't owe taxes on your Roth retirement withdrawals because you already paid taxes on your contributions. That's helpful to those who are trying to avoid taxes on Social Security benefits because you can take out as much as you'd like from these accounts, and your combined income won't go up by a single cent. This can help you minimize how much tax you owe on your Social Security benefits or possibly avoid benefit taxes altogether.
If you don't have Roth savings or you only have a small amount, you may not be able to rely on this strategy as much. Instead, you'll have to keep your tax-deferred retirement withdrawals to a minimum to keep your tax bill low in retirement. Try to limit yourself to only what you need to cover your expenses. Remember, you'll have Social Security to help cover some of your costs.
Your expenses will vary slightly from year to year, and the tax brackets and rules about taxes on Social Security benefits could change over time. You must check in with yourself at least once per year and research any changes to the tax code that could affect your retirement account or Social Security benefits so you don't make any costly mistakes you'll regret later.