Please ensure Javascript is enabled for purposes of website accessibility

3 Ways to Avoid Taxes on Your Social Security Benefits

By Maurie Backman - May 9, 2021 at 7:49AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You may lose some of your future benefits to taxes -- unless you make these key moves.

Many seniors count on Social Security to pay the bills, and chances are, you'll do the same. But did you know that Social Security is subject to taxes? It's a rule that tends to catch recipients off guard. That said, there are steps you can take to avoid losing a chunk of your benefits to taxes -- and keep more of that money for yourself.

1. House your retirement savings in a Roth IRA

Your provisional income will dictate whether your Social Security benefits will be taxed. That income is derived by taking 50% of your annual benefit amount and adding it to your non-Social Security income, which may include retirement plan withdrawals.

Four Social Security cards resting on each other

Image source: Getty Images.

If your provisional income totals $25,000 to $34,000 and you're single, you'll face taxes on up to 50% of your benefits. The same holds true if your provisional income totals $32,000 to $44,000 and you're married. Beyond these thresholds, you risk taxes on up to 85% of your benefits.

Delaying retirement plan withdrawals can help keep your provisional income low, thereby avoiding taxes. But once you turn 72, you'll need to start thinking about required minimum distributions, or RMDs, which could push you over the above limits. On the other hand, if you save for retirement in a Roth IRA, you won't have to worry about RMDs. Furthermore, Roth IRA withdrawals are yours to enjoy tax-free, and they don't even count toward provisional income in the first place, so even if you choose to remove funds from your Roth IRA, they won't work against you.

2. Move to a state that doesn't tax benefits

The aforementioned provisional income limits apply to taxes on Social Security at the federal level. But there are 13 states that tax Social Security as well:

  1. Colorado
  2. Connecticut
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Nebraska
  8. New Mexico
  9. North Dakota
  10. Rhode Island
  11. Utah
  12. Vermont
  13. West Virginia

Now most of these states do offer an exemption for lower earners, and some offer a low enough cost of living that they're worth moving to for your senior years, even if it means taking a hit on your Social Security income. But it's important to keep these 13 states on your radar if you're worried about losing a chunk of your benefits.

3. Hold off on filing until you're no longer working

Because you can claim Social Security as early as age 62, albeit at a reduced rate, it's feasible that you may end up collecting benefits before you're actually retired. But remember, any income you receive will increase your chances of having your benefits taxed, so if you're planning to leave your job at, say, age 65, you may want to hold off on claiming your benefits until then. Doing so will also help minimize the hit you'll take on your benefits by filing early.

Taxes in retirement can be a major drag, especially when you're trying to adjust to living on a fixed income. Unfortunately, Social Security benefits do have the potential to be taxed, but if you play your cards right, you may be able to keep that money out of the IRS's reach.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
390%
 
S&P 500 Returns
125%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.