Social Security Facts and Fiction

KingsX said:
That is not my complaint.

My complaint is having to pay extra taxes on my SS because at age 70
government RMD laws force me to withdraw huge amounts from my IRA.

Unfortunately, we can't vote on government policies... only for some officials who might change those policies.

And speaking of that, I recently read that a second tax reform package is now in the works. So I have spent time today, contacting my congressman and Congressman Brady about this specific important senior issue.

Here is what I emailed:

Please help seniors who are forced to pay draconian income taxes on their IRA RMD and Social Security income.

The tax on SS began in 1983 and at the time the income levels [$25,000 single/$32,000 married couple] at which the tax kicked in were high [ie, back then, the tax only affected the well-to-do.] But those income levels were never indexed for inflation. So now, after 35 years of inflation, people with low incomes are subject to this draconian tax on their SS income.

In a few years when I turn 70, the federal government will force me to take out much larger RMD IRA distributions than I need which will cause my Social Security income to also be taxed. Soon there will be a whole lot of related government hoops I will have to jump through. It’s really unfair to suddenly burden old people with these draconian tax laws.
Click to expand...

KingsX, I"m trying to understand why your taxes will be so high at age 70. I'm not a tax accountant, but by my research and reckoning it shouldn't be anywhere near draconian levels, at least partly because only 50% of SS is added to a 66 year old (and over) filer's taxable income.

Hypothetical case: If Mary Doe get $30K a year in SS she only considers $15K as income.
At age 70-1/2 the minimum distribution of an IRA would be 3.65% of her total IRA holdings. (So even Mary had $200K in IRAs, her minimum distribution would only be $7300 that year.)
Add that to her $15K and she'd be looking at a total reportable income of $22,300.
Standard deduction is $12K for single filers, bringing down that income to $10,300.

Presuming no other deductions or taxable income, the way I can figure it, Ms. Doe's federal tax bill would be $1045. A bit of a sting perhaps, but on a total income of $37,300, it works out to 2.8% of that her income for that year.

If I'm incorrect on this, I hope someone will let me know.
 

the taxing of ss as you go over certain milestones is very very complex . without software it makes my hair hurt .

If your combined income exceeds the threshold amounts, an IRS formula is applied to determine how much of your benefits are taxable. The result of these calculations will be that you pay taxes on the lower of:
  • 85% of your Social Security benefits
  • 50% of the benefits plus 85% of the amount of combined income over the second threshold amount
  • 50% of the amount of combined income over the first threshold amount, plus 35% of the amount of combined income over the second threshold amount
 
Mathjak - my understanding was that only 50% of SS is reported as income after FRA (now age 66). That's incorrect?
 

star song that is incorrect .

50% of the social security amount is added to your other income to see if ss is taxed in the magi testing .. so that is only used to calculate your magi to see if you are taxed . once it is determined you are taxed how much of the ss is taxed is determined below .

If your combined income exceeds the threshold amounts, an IRS formula is applied to determine how much of your benefits are taxable. The result of these calculations will be that you pay taxes on the lower of:

  • 85% of your Social Security benefits
  • 50% of the benefits plus 85% of the amount of combined income over the second threshold amount
  • 50% of the amount of combined income over the first threshold amount, plus 35% of the amount of combined income over the second threshold amount
 
the taxation of ss and the fact you have 2 moving targets can make for some crazy taxation . a single can take an extra 1k out of an ira and that 1k can see the effect of a marginal tax rate of over 46%....

lets call our straw man harry . i am using the old tax amounts , i don't feel like recalculating .


Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be $51,550 - $6,100 - $3,900 = $41,550, which places him in the 25% tax bracket.

If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry's AGI increased by $1,850 for "just" a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!
 
Mathjak, you've convinced me to reach out to my accountant this week to learn when we should start drawing down on our IRAs.

Thank you for taking the time to illustrate just how complex these calculations are - and how easy it is to make an expensive misstep.
 
my pleasure

keep in my mind sometimes the fact that the tax gods give us a gift each year coupled with delaying ss can be a powerful combo .

each year we can take up to 24k out tax free from our ira's using the standard deduction .over 8 years of delaying ss that is 192k in tax free money we wrote off at higher tax rates . we can take up to 42k out and pay as little as 4% tax on it . so spending potential rmd money down while increasing your ss payment can be quite a combo .

the one thing i will caution is accountants do not usually know the ins and outs of retirement planning in its entirety.

think about why , they would have to know all about financial planning too . combining roths , delaying ss , spending down rmd's , getting the right comfortable allocations and getting a comprehensive plan together usually requires a team of pro's .

perhaps both immediate annuities or maybe longevity annuities can improve your plan . perhaps leaving a spouse tax free life insurance and no rmd's may be better than those tax infested ira's ? there can be a lot involved .
 
StarSong said:
KingsX, I"m trying to understand why your taxes will be so high at age 70. I'm not a tax accountant, but by my research and reckoning it shouldn't be anywhere near draconian levels, at least partly because only 50% of SS is added to a 66 year old (and over) filer's taxable income.


.
Click to expand...


It's the burdensome tax laws that begin to affect the elderly at age 70 that are draconian... not only paying extra taxes on Social Security income [many will have to do that for the first time because of the government mandate to withdraw specific amounts from IRAs = RMD]... but also the IRS' draconian penalty if an elderly person forgets the yearly RMD or does not withdraw at least the specific government mandated amount correctly and send required tax payments to the IRS every year. Remember, all that is required not just at age 70... but for all the years of the elderly person's life [if he outlives his IRA.] I think that is draconian, especially because it burdens the elderly.

.
 
then they should have done roth conversions or stuck to brokerage accounts . they can't complain about how taxes are handled later on if they choose to defer the taxes in the first place. getting the deferred tax money due is not an easy taskafter the fact.
 
mathjak107 said:
the taxation of ss and the fact you have 2 moving targets can make for some crazy taxation . a single can take an extra 1k out of an ira and that 1k can see the effect of a marginal tax rate of over 46%....

lets call our straw man harry . i am using the old tax amounts , i don't feel like recalculating .


Harry is an individual with $36,000 of income but a hefty $22,000/year of Social Security benefits. His Social Security provisional income is $36,000 + $11,000 = $47,000, which is $13,000 over the upper threshold for individuals. As a result, $15,550 of his Social Security benefits are subject to taxation (which is 50% of the amount from $25,000 to $34,000, plus 85% of the excess of provisional income above the $34,000 threshold), which puts his AGI at $51,550. Even after a standard deduction and one personal exemption, Harry's taxable income would be $51,550 - $6,100 - $3,900 = $41,550, which places him in the 25% tax bracket.

If Harry now takes an additional $1,000 from his IRA, his provisional income increases to $48,000, his taxable Social Security benefits increase to $16,400, and his AGI rises to $53,400. The net result: Harry's AGI increased by $1,850 for "just" a $1,000 IRA withdrawal, and with a 25% tax bracket his liability will be $1,850 x 25% = $462.50, which equates to a whopping $462.50 / $1,000 = 46.25% marginal tax rate!
Click to expand...


And there is a draconian tax penalty if one doesn't calculate his specific yearly RMD corrently [IRS tax penalty of 50% of an amount not withdrawn per the government mandate.] And tax payments to the IRS must be sent in the same RMD year, sometimes quarterly.

Can you imagine the elderly [especially the very elderly ] doing those kind of calculations every year, especially the tech-challenged [which many elderly are] who would have the burden of the additional cost of hiring a professional tax consultant.

.
 
sorry but if someone does not understand something like their rmd's which by the way the brokerages calculate and do automatically for you if you tell them then they need a planner or accountant who does .

i just can't agree with you here as not understanding something someone does , and the requirements that go with that tax deduction they wanted to take are what they are . it is up to each of us to have people who understand what has to be done if we don't .
 
mathjak107 said:
then they should have done roth conversions or stuck to brokerage accounts . they can't complain about how taxes are handled later on if they choose to defer the taxes in the first place. getting the deferred tax money due is not an easy taskafter the fact.
Click to expand...


Don't expect everyone to be smart, educated and tech-savvy like you. Don't be the one to tell the "unwashed masses" to "eat cake."

Many of these elderly might have been a guy who worked in a factory or a girl who worked in an office. They may have put their money into a 401K because they were told it was the smart thing to do, that it would grow tax-free and they would pay the tax when it was withdrawn. I doubt they were initially told about all the other future draconian tax consequences. They might also have taken a pension lump-sum and rolled it into an IRA and are now suddenly and unexpectedly facing these draconian tax hoops.

.
 
this has zero to do with telling anyone to eat cake .

i highly doubt there are many people with tax deferred accounts that don't know they have to take rmd's at some point . brokerages will notify you as well when you hit 70-1/2 . every custodian not only notifies you and gives you the amount but tells you they can auto pilot it for you. there really is nothing to do on your end as it is all automated once you pay attention to the notice . i believe your custodian is required to notify you about the rmd's as well .

all the penalty's are not for not knowing , they are for not taking the steps and paying attention to the notifications to allow the custodian to do this automatically for you .

if anyone is so financially ignorant that they don't know they owe taxes on retirement money they deducted then they should have taken the time to learn at least the basics . most people know more about sports and their refrigerator than they do even the most basic important financial aspects of their lives and there could be a price to pay for not taking an interest . sorry no sympathy from me here
 
those who take no interest in their financial lives are doomed to pay the price ! if they think the cost of learning a bit is costly in time or paying the right people wait until they see what ignorance cost . you can put that with your mantra's .
 
mathjak107 said:
most of us will go on past break even and of course break even can vary for all of us.spousal benefits and whether the bigger gains are in the early part of our retirement or later on effect your outcome too .

the biggest reason to delay is not what if i die but what if i live ? it really boils down to whether you want to be more stock market and interest rate dependent or longevity risk dependent .

your 70% bigger check at 70 has you far less dependent on what markets or rates do once ss kicks in .survivor benefits are bigger too if that matters
Click to expand...
I get what you're saying MJ but my personal circumstance is this: I get a pension that more than adequately covers my personal expenses. I don't really need my SS, so I save/invest it. My investments are doing well. I figured out that based on adding the SS money to my investments, I'd get about $300 more a month (if I were to take distributions) than SS would pay starting at age 70. But since I'm still putting money in, it stands to reason that I don't have to take any distributions. Unless I have a catastrophic illness or a long nursing home stay, I'll never need to touch my investments.
For years I suffered with atrial fibrillation and really didn't expect to live this long. At age 50 I met my half siblings, but one had died. My sister had the same heart ailment as me. She decided to wait till full retirement age to collect her SS. But she died at age 63. Now I'm healthier than I've ever been, had a cardiac ablation 2-1/2 years ago so no longer have A-Fib. Even so, I don't regret taking SS early. But because of possible changes to SS coming down the pike, I have changed my die hard stance on taking it early to it might be best to wait until full retirement age, at least.
 
there is no ideal point for any of us . each age will have different issues good and bad .

people have to remember that taking ss early and investing the money is a double edge sword . if you take ss early you have the ss money so you either are not pulling money out of invested assets to replace the ss to live on or you are investing the ss money . but if this bull dies , which this late in the cycle there is a good chance and we stagnate then the invested money will grow little .

on the other hand if that does happen there is a good chance the bull will cycle around again in a few years and that 70% larger ss check you get by delaying will have one pulling out way less money to live on for the rest of their lives allowing invested assets to grow .

so the point is there really is no guarantee that taking it early and investing the money will beat taking it later and investing the money .

the wild card is when the bull market is .

on the other hand if one delays and they are a couple , if even one of them reaches 90 they got the guaranteed return from ss that a balanced fund would have if markets co-operate .

so really it comes down to do you want more market and rate risk or more longevity risk ?

we opted to go midway and i took it at 65 and my wife 62
 
mathjak107 said:
there is no ideal point for any of us . each age will have different issues good and bad .

people have to remember that taking ss early and investing the money is a double edge sword . if you take ss early you have the ss money so you either are not pulling money out of invested assets to replace the ss to live on or you are investing the ss money . but if this bull dies , which this late in the cycle there is a good chance and we stagnate then the invested money will grow little .

on the other hand if that does happen there is a good chance the bull will cycle around again in a few years and that 70% larger ss check you get by delaying will have one pulling out way less money to live on for the rest of their lives allowing invested assets to grow .

so the point is there really is no guarantee that taking it early and investing the money will beat taking it later and investing the money .

the wild card is when the bull market is .

on the other hand if one delays and they are a couple , if even one of them reaches 90 they got the guaranteed return from ss that a balanced fund would have if markets co-operate .

so really it comes down to do you want more market and rate risk or more longevity risk ?

we opted to go midway and i took it at 65 and my wife 62
Click to expand...

MJ, Did you work in the financial analysis field? Your advice is much appreciated.

I started SS at 65, my husband will draw spousal benefits when he turns 66 and file for his own benefits at 70. As you said in earlier posts, chances are excellent that at least one of us will live long enough to make the delay worthwhile. We also have life insurance policies on each other to help make up for the SS shortfall if one of us passes early.

Can you recommend a website with a tax calculator that will help sort out some of the questions on when to start drawing from IRAs? We are not yet at the age of MDR, but since we're supplementing our income right now with (already taxed or tax-free) savings/investment draws, we might also be wise to start cashing in some of those IRA funds.

I wonder: if SS becomes means-tested, are the feds likely to compensate by waiving or reducing taxes on IRA withdrawals? Any thoughts on that?
 
i never think about what could be . i plan around what what was ,what is and what stands a reasonable chance of continuing. then like nudging a big ship to keep it on course you nudge it along the way if the big picture changes .

most really good work ups are not free calculators . social security solutions is a good company to try . they charge a small fee based on the work ups you want
 
Both my wife and I recently applied and were approved for Social Security. You really need to know what you are doing. In my case they did not press delaying my benefits. Instead they kept informing me that I could back date my retirement to age 66 and get a check for that year and then start regular checks at my current age of 67. I told the lade that means I lose the 8% increase that I would get if I started at 67. The second time they called they reminded me again of this.

Then we wanted my wife to collect spousal benefits. We filled out the only application and marked spousal benefits only. Sure enough when they called they were going to give my wife her benefits first and make up the difference with mine. I told them that is not what we put down on the application. We wanted my wife to get spousal and then at age 70 switch over to her own rights which would give us a few thousand more a year.

It really was like the online application meant nothing. Three calls each to go over what we entered on the application and some bad advice. I was curious as to why they were pushing that we file for the previous year instead of getting the higher rate at our current ages. I would have thought that they would push delaying but that was not the case. In fact, they never mentioned it. It seemed that information we provided previously was forgotten about and we had to answer so many questions again and again each call.

Luckily I had bought some software that showed me how to maximize my benefits in what if stituations and dates to apply. I followed that and not what I was being told over the phone. We were also told to mail in a copy of our marriage license and then a few weeks later we were told that we did not have to do that. I am supposed to get my first check in a few weeks for June. Then my wife will start getting hers in August to cover July when she turns 66. I hope they got it right but after talking to them my confidence level was not that great..

My wife told her friends about how we did it to maximize the money we get and none of them were aware of being able to first collect spousal and then switch to their own after it increased 8% each year. They also did not know that they get 8% more each year they delay. Doesn't anyone research anything anymore? I have been learning for the last few years so I knew what I was talking about and was able to get things straightened out. I thought this would be as easy as applying for Medicare with an online application that spelled out exactly what we wanted but that was not the case. I have my finger's crossed until my first check comes in a few weeks.
 
you get an increase in ss of only 6% from 62 to fra , it then increases to 8% from fra to 70.

if you were at least 62 in 2015 you can file restricted application for spousal but only at your own fra . you can not do restricted application if you under fra . for those who were younger than 62 in 2015 , game over , you can only get your own benefit if you have a work record .

you can still get a spousal adder to your own benefit when your spouse files . they take 1/2 the spouses fra benefit , subtract your fra benefit from it and anything left over gets added to your own benefit.
 
mathjak107 said:
there is no ideal point for any of us . each age will have different issues good and bad .

people have to remember that taking ss early and investing the money is a double edge sword . if you take ss early you have the ss money so you either are not pulling money out of invested assets to replace the ss to live on or you are investing the ss money . but if this bull dies , which this late in the cycle there is a good chance and we stagnate then the invested money will grow little .

on the other hand if that does happen there is a good chance the bull will cycle around again in a few years and that 70% larger ss check you get by delaying will have one pulling out way less money to live on for the rest of their lives allowing invested assets to grow .

so the point is there really is no guarantee that taking it early and investing the money will beat taking it later and investing the money .

the wild card is when the bull market is .

on the other hand if one delays and they are a couple , if even one of them reaches 90 they got the guaranteed return from ss that a balanced fund would have if markets co-operate .

so really it comes down to do you want more market and rate risk or more longevity risk ?

we opted to go midway and i took it at 65 and my wife 62
Click to expand...
Yeah...it could go either way....either way. :rolleyes: I'm surprised you weren't a financial professional !
 
You must log in or register to reply here.

Back
Top