At what age will you take Social Security?

[donheff]

However, You can indeed increase your after tax income by delaying SS and spending down your nestegg in anticipation of extra SS income. This is because the tax laws are so regressive with respect to SS and other income.

This would only apply if you didn't have other income (RMDs, taxable pension, etc) that took you up to the point where every dollar of SS is taxed. With income at that level the tax implications are not in favor of waiting.

 

[FIRE'd@51]

Yes, MB, I ignored taxes in the above calculation. As you say, the problem with taxes is you just don't know what Congress is going to do. Especially when you are looking out 5-10 years, or longer. My guess is that there will be more means testing of SS and maybe even Roths. Who knows? As SS comes under pressure Congress may give more breaks on withdrawals from IRA's. They have already made RMD's lower with their new tables.

With regard to SS, for me the most important consideration is life-expectancy. So if I can earn enough on early SS payments to push the break-even point several years past the life-expectancy for a 66-year old, I think that is the optimal way for me to go.

 

[retire@40]

You obviously didn't include taxes.

I don't think he could factor in taxes in a general equation like that since everyone is in a different tax situation.

As an example, in 2005 dollars, a married couple can have $26,000 in tax-free social security benefits and other taxable income of $18,400 (assuming a standard deduction of $12,000 and personal exemptions of $6,400) and pay no federal taxes at all.

That's a total of $44,400 of income before taxes even start to become an issue.

 

[Mr._johngalt]

I don't think he could factor in taxes in a general equation like that since everyone is in a different tax situation.

As an example, in 2005 dollars, a married couple can have $26,000 in tax-free social security benefits and other taxable income of $18,400 (assuming a standard deduction of $12,000 and personal exemptions of $6,400) and pay no federal taxes at all.

That's a total of $44,400 of income before taxes even start to become an issue.

That's where I am now. I pay -0- federal income tax and it feels pretty
good. I should have included this in my "ER Surprises - Letterman style"
post since I had no idea this would happen when I first ERed.

JG

 

[MasterBlaster]

This would only apply if you didn't have other income (RMDs, taxable pension, etc) that took you up to the point where every dollar of SS is taxed. With income at that level the tax implications are not in favor of waiting.

That's not true.

<Reposted for your enjoyment>

Just to spell out clearly the retire at 70 game plan just look at what happens to a dollar of taxes when you are above the threshold.

On that dollar of extra income you pay.

1) Income taxes on that dollar
2) Plus up to 85 percent (either 50 or 85 percent) of the income from a dollar of SS income which has just become taxable.

So, for example, if you are in a federal bracket of 25 percent you get taxed for that extra dollar at 25 % regular income taxes plus 85 percent of the (over the threshold SS income) for a net tax rate on that extra income of 25 + 0.85 * 25% = 46.25 percent marginal tax rate. That rate isn't even applied to people with million or even billion dollar income.

Now Throw in your state tax and it's even a worse deal for those with "extra" income.

So the retire at 70 game plan just says delay SS and spend down some of that IRA/401k/after tax stash so that when you get SS at 70 less of your income is taxed at that 46 percent (or higher considering state taxes) marginal rate.


Quote from: FIRE'd@51 on September 17, 2006, 03:11:39 PM
I don't follow this example. For a married couple, the 25% bracket starts at a taxable income of $61,301. Assuming this couple took the standard deduction ($10,300) and 2 personal exemptions ($6,600), they would have to have a gross income of at least $78,201 (more if they itemized on Scedule A) to be in the 25% bracket, well above the SS taxability thresholds. At this level, a dollar of SS income (of which 85 cents is taxed) would have an effective marginal tax rate of 0.85*25% = 21.25%, not 46.25%

Usually, these "higher than you might think" marginal rates are the result of triggering something that causes a change in tax rate on a type of income or the disallowance of a deduction (e.g the AMT) or the phase out of a deduction or exemption. Now, if that $78,200 included qualifying dividends and LT capital gains (taxed at 5% in 2007 and 0% in 2008-2010), and extra income (SS or otherwise) were to fill up the 15% bracket bucket, thereby pushing some of the dividend/LT gain income into the 25% bracket where it would be taxed at 15%, you would see the effect you are talking about. However, that would "only" raise the effective marginal rate on that SS dollar to 21.25% in 2007 and to 25.5% in 2008-2010.

Just a few points

1) The $61301 threshold for the 25 percent tax bracket includes one half of your SS income. So if you are one of the heavy hitters and get upwards of $2k a month from SS then the effective 25% threshold starts at under $50k/year income.

2) So any non exempt, non-SS income you have above $50k gets taxed at the marginal federal rate of 46.25%. Plus whatever your state wants to tax you.

3) Now the above discussion is just for the 85% tax rate on SS income. The 50% tax rate on SS income starts at just $32k. If you are a higher level SS receipient then the effective 50% tax rate starts at under $20k of non SS income.

4) The marginal federal tax rate for the $32k to $44k income including half of your SS check is 15% + 0.5*15% is 22.5%

The marginal federal tax rate for the $44k to $61.301k income including half of your SS check is 15% + 0.85*15% is 27.75%

The marginal federal tax rate for the income over $61.301k including half of your SS check is 25% + 0.85*25% is 46.25% <Note corrected for typo>

Plus whatever your state wants to tax you for SS income.


I believe that if you have income separate from SS above any of these thresholds that you just may want to think about when you start taking SS income.

 

[donheff]

Masterblaster. I find the discussion confusing. Can you run this by me:

$140 K of taxable income before SS starts. Then SS starts and drops it to $120K (plus the $20K SS). Does it matter when SS starts? Not a challenge, just a question.

 

[MasterBlaster]

Donheff:

There are two (or more) things being discussed.

1) Dory36 suggested in another thread listed here
http://early-retirement.org/forums/index.php?topic=9788.msg178067#msg178067

that you'd draw around $141k if you'd retire at 62 versus full retirement age and invest the money earning 5.6%.

The conclusion there was that the early draw on SS plus interest makes the cumulative SS payout about the same as getting SS at full retirement age.

So some suggested that just in case you might die, you might as well start SS early. The total cumulative payout amount won't change by much.

2) The other thing, of which I had lots of input on, was that current tax law hits other income very very hard if you are collecting SS.

My conclusion, of which I am helping for others to see, is that under current rules you'd be better off delaying SS and spending some of your savings instead. When you eventually do retire you'll get more SS income and the other income form your non-SS savings (now at a lower amount) will not be taxed as heavily. The gross income will be approximately the same. But the after-tax spendable portion will be considerably higher

So if you don't die young you just may be better off in terms of real after tax income by delaying the start of SS.

Notice that the conclusions from #1) and #2) are different.

 

[sendbaht]

62 for me and hope I live long enough to wish I took it at 66.

 

[FIRE'd@51]

62 for me and hope I live long enough to wish I took it at 66.

LOL - that's a nice utility hedge!

 

[Alex]

as soon as I am able, I will take the SS. That is the best strategy IMHO. Get while ya can!!

 

[OAG]

I asked the specific question: Can a 66 yo person who started SS at 62 yo withdraw the application, repay the funds received, and then restart benefits at current or later age. The reply is a bit confusing but basically you apply to with draw the prior approved application (they have the form on the download froms page at www.ssa.gov. If they approve your application for withdrawal, you send them the money and start all over at the then applicable rate. NO LONGER HAVE TO SPECULATE ON THIS QUESTION ON THIS AND OTHER SS THREADS. This is the reply (received from SSA date 10/4/06 at 11:40 pm) I got via email from the SSA:

"Thank you for your inquiry.

There is nothing illegal about the practice.

· If you will continue working, benefits for months prior to full retirement age will be subject to the annual earnings test.
· You should contact the Internal Revenue Service or their tax advisor regarding any tax liability they may incur as a result of receiving the Social Security benefits;
· If you are receiving a reduced benefit and you should die before FRA, the benefit rate payable to his or her surviving spouse would be computed based on the deceased individual’s reduced benefit rate, rather than the individual’s full benefit rate.
· Before SSA can approve a request to withdraw an application, all funds paid based on that application, including funds withheld as payment of Medicare premiums must be repaid;
· If the conditions for withdrawal are met and withdrawal is approved, the individual will only have 60 days to cancel the withdrawal request after which he or she will lose any possible entitlement for the period covered by the original application (except for any retroactivity allowed under a subsequent application); and
· If the individual withdraws the application before becoming entitled to Medicare, he or she will need to be aware of the Initial Enrollment Period (IEP) for Medicare, Failure to file a subsequent application during the IEP could result in a higher premium."

Now where are the spread sheets to show any monetary benefit to do this is you have the money to repay approximatelly $50,000 in benefits. Will have to factor in Medicare Premiums whch if you leave them out (may be some benefit to doing this) you then would be subject to the premium increase because you would be waiting more than one but less than 2 years to enroll.

 

[FIRE'd@51]

I wonder if you are charged interest on the money you got early and then repayed? If not, there may be a strategy here to arb the SS system.

 

[OAG]

If you download the form SSA-521 from the SSA Site it makes absolutely no mention of interest nor did my reponse from the SSA. Seems to be a very simple process and simple form. You have to give a reason for requesting it but it does not imply that your need any elaborate reason. Guess if you think you made an uninformed decision to take the benefits in the first place and you can repay the funds it may be approved. They did allude to the Medicare Part B process which I assume you would also have pay your part B preimums out of pocket and do so in conjunction with the old application withdrawal or you would face a lifetime increase in the premiums (which I think would be a 10% surcharge on the usual rate applicable).

There is a very clear discussion of the Tax implications in IRS Publication 15 (page 79 is most applicable) which can be downloaded in pdf format from the IRS site. It looks like you can get reimbusement of taxes paid on past SS benefits without any amendment of past returns.

I would suggest a close review of this process, if someone contemplates doing it, using something like Excel as it is a bit complicated and you have to consider the impact on taxes for each year, the MEDICARE Part B impact, and the fact you are wiping out the past application totally and, if approved, you will have to reapply again for benefits whenever you desire to. I am not sure of the impact yet if your spouse started drawing before you and had thier benefits increased in conjunction with your approval of initial benefits. Since they were getting a lesser amount based on thier own work record and then received a higher amount based on the spousal benefit I would assume the increased amount attributed to your now withdrawn application would have to also be repaid. You may find that this process is not worth the effort from a practical view and may find the same thing from a financial view.

 

[Nords]

If you download the form SSA-521 from the SSA Site it makes absolutely no mention of interest nor did my reponse from the SSA. Seems to be a very simple process and simple form.
There is a very clear discussion of the Tax implications in IRS Publication 15 (page 79 is most applicable) which can be downloaded in pdf format from the IRS site. It looks like you can get reimbusement of taxes paid on past SS benefits without any amendment of past returns.

The possibility of not having to file amended returns is such a great deal that it seems too good to be true...

 

[shorttimer]

Both my parents died before they were old enough for social security. Older Sibs are having health problems.

If I end up paying more taxes or losing out a little because I take it at 62 instead of waiting how can I not still come out ahead? I'm just focused on trying to still be around that long!!