Social Security: Debts, Fees and How to Avoid Them

Are your clients planning to use Social Security? If they’re not, it’s probably because they do not know enough about it. You should be the one to start this conversation. But how? Reading Bank Investment Consultant would be a good start. We’ve been running videos and tips on the program this week. 

We asked regular magazine contributor Dave Lindorff to research and compile a set of tips for advisors. So far, we’ve presented 11 and today we have the next three. And check back tomorrow as we continue to roll them out.

You don’t need to retire to collect Social Security, even at age 62, but you will pay a penalty

Those who retire at 62, or before reaching full retirement age of 66 (67 for those born after 1960), pay a penalty of $1 for each $2 earned over $15,120 in 2013. For those who are reaching full retirement age of 66 this year and who start collecting Social Security will pay a $1 penalty for every $3 earned over $40,080 (these limits are raised each year for inflation). But don’t be too troubled by the penalty. The Social Security Administration, after you reach full retirement age, will adjust upward your benefit amount to reflect the extra money you earned by continuing to work while collecting early benefits, and the money that was withheld as a penalty.

Social Security income is protected by law from most creditors – but not from debts owed to the IRS, federal student loans or other federal government claimants (or from alimony or child-support payments).

This means you may want to settle federal debts using other assets before you are depending upon your Social Security benefits in retirement, but it also suggests that if you have transferred other assets, for example into a Trust for your children, you don’t have to worry about private creditors.

Social Security income is taxes at less than other income

If your taxable income is less than $25,000 or $32,000 for a couple filing jointly, you owe no income tax on your Social Security benefits. Above that amount, the taxable amount of your Social Security benefits increases with income to a maximum of 85%. However, since withdrawals from a Roth IRA don’t count as taxable income, it can be advantageous to start withdrawals from non-Roth retirement funds, holding Roth withdrawals until you start collecting benefits.