Tax Trick: When to Start Social Security

A client reaching age 66 now is at “full retirement age,” according to the Social Security rules. Such seniors can claim their retirement benefits without any reduction, no matter how much they continue to earn.

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Comments (11)
This is a viable strategy in the right situation. The most important issue is the client knows what they are deciding to do. They are giving up a known benefit--an earlier Social Security payment--for an unknown--a larger payment for a shorter period of time starting at some point in the future.

They are also using up real assets to support their lifestyle until the Social Security payment kicks in down the road. For those clients who think they will beat the odds and live beyond life expectancy, it can be a win. But you have to be able to sleep nights as you see your IRA decline in value or grow marginally as you pull from it to provide your desired cash flow. There is no doubt there are real tax benefits if the strategy works as described, but you have to be alive to collect them.

Bill Cantrell CPA,CFP
Cantrell Financial Strategies
Posted by BILL C | Tuesday, August 05 2014 at 3:46PM ET
Mr. Lumia or Mr. Korn,

I can not make sense of your example. I do not know where you got your numbers. And by the way, what is tax bill for taking the full amount from the IRA while you are waiting to maximize your SS? Please provide more details.

Keith Bonner
Posted by Keith B | Tuesday, August 05 2014 at 4:20PM ET
There is another advantage for delaying SS, especially for the spouse with higher earnings. The surviving spouse will have that higher benefit for the rest of their life.

In some circumstances when one spouse is already taking their SS, when the second spouse reaches FRA, they can opt to suspend and take half of the SS benefit being received by their spouse while they delay their own ss benefit until age 70.

The insidious nature of taxation on SS benefits means that a taxable withdrawal from an IRA could result in taxes on another 50%. Example: If your 'provisional income' is too high, the withdraw of $1,000 would result in paying taxes on $1,500. At the nominal tax rate of 15% the result is $225 of taxes. On the original $1,000 that is a tax rate of 22.5%, almost as bad as 25%.

Using the 4 years between FRA and 70 gives an opportunity not only to use IRA money and be taxed for just the withdrawal amount, it also may allow for some strategies to convert IRA funds to Roth IRAs while remaining in the 15% or 25% nominal tax rates.

For the non-statistically oriented "I want mine now" attitude, note that the statistics are that the SS 'fund' takes into consideration life expectancy rates at every age (62, 66, or 70) and when you choose to take SS you are not seriously affecting the 'fund' balance. But a SS recipient will definitely notice the ongoing effect of living too long if they began ss benefits at 62 and then live past the age of 80.

PS. The phrase "in the right situation" is why we are called advisors, consultants, or coaches. No size fits all!
Posted by Richard S | Tuesday, August 05 2014 at 6:13PM ET
Not sure of the math here based on the facts presented. Yes only 50% of the Social Security income is used to determine the taxability of Social Security - MFJ threshold is $32K for 2014. So, in the example with income of $97K, clearly SS income will be taxed. And, since their MAGI is greater than $44K, 85% of their SS income will be taxed. The Federal tax savings will be $684 NOT $6,492. A 15% exclusion on the $30,405 increased SS income or $4,561. This reduced taxable amount is then taxed at the 15% marginal tax bracket for a savings of $684. ($70,411-40,006)*.15*.15)= $684.

Over an extended retirement, such tax savings will likely be incidental to longevity factors, COLA rates and formulas, what happens to long-term capital gains rates, the dividend exclusion and tax brackets and other sources of income.

To come out ahead by delaying SS benefits to age 70, depending on tax brackets and investment rate or lost opportunity cost of return (@5.5% tax deferred) will require that benefits are received to at least age 85. Live shorter and you will receive a lower NPV benefit.
Posted by Mark K | Wednesday, August 06 2014 at 4:55PM ET
The couple will also pay an additional $1,232 in taxes during the first four years "everything being equal". So the tax breakeven wouldn't even happen until around year 8!
Posted by Mark K | Wednesday, August 06 2014 at 5:04PM ET
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