If you're like most seniors, your Social Security checks will be very important in helping you cover the costs you face in your later years. You don't want to lose any of the retirement benefits you're counting on -- but that can happen if you find yourself paying unexpected taxes on those benefits.
The good news is that you can put money into a particular type of retirement account if you want to protect your Social Security from being taxed, allowing you to keep more of this crucial income source.
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This retirement account could be the ticket to keeping more of your benefits
Social Security benefits will not be taxed on the federal level until your income hits a certain threshold. Once you have a countable income of $25,000 as a single tax filer or $32,000 as a married joint filer, at least a portion of your benefits is taxed by the IRS. Unfortunately, since these thresholds are not indexed to inflation, a growing number of people end up owing taxes on Social Security benefits each year because benefits naturally rise over time due to inflation.
The key, though, is that only countable income is used to determine whether you will be taxed on your benefits. And there's a type of retirement account that will produce distributions that are not countable: a Roth account. See, countable income equals half your Social Security benefits, a limited amount of nontaxable income, and all taxable income. Since Roth distributions are not taxed, they are not included.
If you choose a Roth account, you can withdraw as much money as you want -- and as much as you require to meet your needs. Your Social Security benefits won't be affected in any way, and unless you have lots of other countable income, it's likely you'll be able to escape paying taxes on your benefits entirely.
Is opening a Roth retirement account right for you?
Not only do Roth accounts help you earn tax-free income from Social Security, but you also get to take distributions from them without paying taxes on the money. This means the bulk -- or even all -- of your retirement income will be yours to keep instead of giving a cut to the government. That's a huge advantage when you need money to cover your costs after you stop receiving paychecks.
Now, the downside of Roth accounts is that you cannot deduct the contributions that you make to them in the year you put the money into the account. So if you think your tax bracket is higher while you're working and saving than it will be in retirement, you might be better off using a traditional 401(k) and/or IRA and claiming your tax savings up front rather than deferring it.
But for many people, the opportunity to avoid taxes on Social Security and enjoy other tax-free income as a retiree is too good to pass up. If you want to ensure you don't lose any of your Social Security checks to the IRS, this approach is worth investigating.
