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Many widows and widowers will retire at an early age on either their own or their spouse’s survivor Social Security benefits and then switch to the opposite benefit when they turn 70. This is a very normal and legal process to follow.
The problem is that many who do this only consider their financial picture at the age when they plan to retire early. The fatal flaw comes when they turn 70 and did not plan for that situation in advance.
The problem exists when their increased SS benefits plus their required MRDs push them into the 25% Federal tax bracket.
Assuming that your FRB, Full Retirement Benefits, and you late spouse’s FRB are about the same. At age 62 you can retire on about 81% of your survivor benefit at say $20,000, then at age 70 switch to 129% of your own benefit at about $32,000.
Basically, at age 70 you are getting a $12,000 increase in your benefit income plus you are now required to start taking Minimum Required Distributions (MRDs) from your taxable traditional IRA accounts. The annual percentage for the MRDs increases with age, starting at age 70 that is 3.65%, 3.77%, 3.91%, 4.05%, 4.20% continuing to increase each year.
At the beginning of your personal 25% Federal bracket, the basis for the taxation of your Social Security benefits probably puts you in the 85% taxability bracket. This means that a $100 withdraw from a taxable source, your IRA, results in an additional $85 of your SSB also becoming taxable income. You will pay an additional 25% of $185 or $46.25 for each additional $100 you withdraw, each $100 of MRD.
The important thing to consider here is that you should do the math, don’t just calculate what your income and taxes will be at age 62, but also calculate what they will probably be at age 70 and beyond. Once you have this information you will know in advance if you need to take steps before the age of 70 to avoid paying the 46.25% marginal tax rate.
The problem is that many who do this only consider their financial picture at the age when they plan to retire early. The fatal flaw comes when they turn 70 and did not plan for that situation in advance.
The problem exists when their increased SS benefits plus their required MRDs push them into the 25% Federal tax bracket.
Assuming that your FRB, Full Retirement Benefits, and you late spouse’s FRB are about the same. At age 62 you can retire on about 81% of your survivor benefit at say $20,000, then at age 70 switch to 129% of your own benefit at about $32,000.
Basically, at age 70 you are getting a $12,000 increase in your benefit income plus you are now required to start taking Minimum Required Distributions (MRDs) from your taxable traditional IRA accounts. The annual percentage for the MRDs increases with age, starting at age 70 that is 3.65%, 3.77%, 3.91%, 4.05%, 4.20% continuing to increase each year.
At the beginning of your personal 25% Federal bracket, the basis for the taxation of your Social Security benefits probably puts you in the 85% taxability bracket. This means that a $100 withdraw from a taxable source, your IRA, results in an additional $85 of your SSB also becoming taxable income. You will pay an additional 25% of $185 or $46.25 for each additional $100 you withdraw, each $100 of MRD.
The important thing to consider here is that you should do the math, don’t just calculate what your income and taxes will be at age 62, but also calculate what they will probably be at age 70 and beyond. Once you have this information you will know in advance if you need to take steps before the age of 70 to avoid paying the 46.25% marginal tax rate.
