When I'll Take SS

[MJ]

Of course, you can take advange of the following option, if it is still available in the future. Start collecting any time after 62 with the intent of giving back all your past payments for let's say, 3 years (needed to ammend your IRS returns) if you have the cash. You can then restart the clock to begin collecting the higher monthly payments 3 years later, if you feel confident that the gubment will continue to honor its promises.

 

[Tadpole]

WilliamG and New Thinking

I thought that if the lower wage spouse took SS at 62 and the higher wage spouse took SS at full retirement age, the surviving lower wage spouse was dinged on the higher wage spouse's full retirement. If this is not the case, I will be very happy.

 

[rs0460a]

the risk that I am taking (die too early)

Not a risk at all.  I doubt if you will be concerned about not getting your "share" once you're gone 

- Ron

 

[Caroline]

Of course, you can take advange of the following option, if it is still available in the future. Start collecting any time after 62 with the intent of giving back all your past payments for let's say, 3 years (needed to ammend your IRS returns) if you have the cash. You can then restart the clock to begin collecting the higher monthly payments 3 years later, if you feel confident that the gubment will continue to honor its promises.

Now that right there was worth the cost of admission! Thank you!

Do you have to pay back with interest and if so, how much?

 

[Cattusbabe]

I plan to delay taking SS until age 70.   Regular retirement date would have been  age 66 and 10 months. DH is 13 years older than I and took his at 62.  My SS is the higher of the two. We are using his to pay for health care until he hits 65 and medicare kicks in.  After that we will use it for his medigap policy and my health insurance premimums.  Our other expences are covered by his savings and investments.  I will start dipping into my stuff when I reach  59 1/2.  I have no need to touch SS early at this point.

 Our main concern going forward is continuing to live at home and bring in services as needed as DH and I age. Health insurance and long term care insurance does not cover everything you need. Holding off on taking SS until 70 may make the difference when it comes to hiring staff to take care of us at home.

 

[donheff]

Of course, you can take advange of the following option, if it is still available in the future. Start collecting any time after 62 with the intent of giving back all your past payments for let's say, 3 years (needed to ammend your IRS returns) if you have the cash. You can then restart the clock to begin collecting the higher monthly payments 3 years later, if you feel confident that the gubment will continue to honor its promises.

Does that also give you the opportunity to pay tax on teh same monet twice?

 

[New Thinking]

Tadpole

Tadpole - You need to be a little clearer on your question. I'll take a guess nonetheless. As far as the survivor benefit, the spouse steps up to the deceased's benefit (100% of what he/she was receiving).

For a spousal benefit when both are living, it gets more complicated and this could be what you are thinking of. A lower-earning spouse could start her/his own SS at age 62 and lock in a permanent reduced benefit. Then, it is possible in some circumstances that a spousal benefit is available once the higher earning spouse retires and files for benefits. In this case the "early" benefit at 62 is indeed carved out (dinged to use your terminology) and a spousal benefit is paid on top of that other benefit (and this could be a full benefit or a reduced benefit depending on the age at that point).

 

[MJ]

Does that also give you the opportunity to pay tax on teh same monet twice?

As I understand it, no. That's why you ammend your tax returns to recoup any tax you may have paid because of the additional SS income. That is also why you want to do it only for no more than 3 years since you can only ammend no more than the last 3 year returns. I don't know if you can do this option more then once. If you could, you can start at 62, restart at 65, then again at 68, and finally at 70.

 

[JPatrick]

I'm not entirely certain I follow some of the posts here regarding the surviving spouse's benefit, but you may want to check this thread for a detailed discussion from a few months ago.
http://early-retirement.org/forums/index.php?topic=6327.0

 

[MasterBlaster]

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 cut 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.

 

[sgeeeee]

I used to be in the "take the money and run at 62" camp.  I worry about what future legislation might do to our benefits.

Waiting to collect clearly provides more value if you live a long life.  Nothing helps reduce longevity risk as much as a COLA'd benefit.  On the other hand, it's not about maximizing the payout, it's about maximizing your own comfort and enjoyment.  I'm not sure the 70 year old me will get nearly as much of either as the 62 year old me. 

So now, I think we will use the marriage advantage.  Our current plan is to start taking DW's ss when she reaches age 62.  Her benefit is slightly less than mine will be.  Then, we will start taking mine at a later date (age 65 or later depending on our portfolio performance and needs). 
If we both die before the actuarial tables predict, we will at least have gotten something from the system.  If we both live a long, healthy life, then we will have at least maximized a portion of our COLA'd benefit.  If one of us dies earlier than the other, the survivor has to option to take the higher of the two benefits.

 

[whitestick]

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 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.

Does this mean that if your income each year will be much higher then the threshold so that you are paying taxes on the full amount of SS, that you will be screwed enjoy that higher tax rate forever? Sort of defeats the benefits of SS doesn't it, if your required expenses put your income at a significantly higher level.

Second question: In other posts, the comment was made to spend your taxable accounts before the IRAs/401ks, ostensibly to minimze the tax bite and allow that money to earn additional income for you. Given the above scenario, where the IRA/401k moneys are taxes at earnings rate, and the assuming the taxable accounts are cap gains, with a lower tax rate, it appears intuitively that is exactly opposite of what I would want to do. What am I missing?

 

[Texas Proud]

Does this mean that if your income each year will be much higher then the threshold so that you are paying taxes on the full amount of SS, that you will be screwed enjoy that higher tax rate forever? Sort of defeats the benefits of SS doesn't it, if your required expenses put your income at a significantly higher level.

Second question: In other posts, the comment was made to spend your taxable accounts before the IRAs/401ks, ostensibly to minimze the tax bite and allow that money to earn additional income for you. Given the above scenario, where the IRA/401k moneys are taxes at earnings rate, and the assuming the taxable accounts are cap gains, with a lower tax rate, it appears intuitively that is exactly opposite of what I would want to do. What am I missing?

Before answering your question... I think that most people on this board will have income so 'all' of their SS is taxed no matter what strategy they use.. "all" is whatever percent Congress deems should be taxed.. which I think will go to 100% with the reforms that are to come...

But yes, IMO you should take out from your IRA first until you get to the 25% rate... or close to it. then start to use your taxable money... let your ROTH grow like crazy... This assumes no pension coming in.. if so, then you just treat that as your first 'withdrawl' then IRA etc...

 

[Cut-Throat]

Sort of defeats the benefits of SS doesn't it, if your required expenses put your income at a significantly higher level.

Well by your logic, then having any income at all, if taxed, would defeat the benefit of that income! I'll still take my SS, even if I have to pay taxes on it.

The way I understand it, is that 85% of it is taxed, if you exceed the limit of 44K for a married couple.

Also, remember that the amount you earn in your IRAs is not counted as income, until you withdraw it. So only the amounts in the Taxable Accounts earning income(dividends, interest) would add to the $44K limit. Not the amount you withdraw from your taxable accounts!

 

[Nords]

Also, remember that the amount you earn in your IRAs is not counted as income, until you withdraw it. So only the amounts in the Taxable Accounts earning income(dividends, interest) would add to the $44K limit.

If the IRA withdrawals come from a Roth then they're not even counted as income.

 

[d]

If the IRA withdrawals come from a Roth then they're not even counted as income.

... wouldn't be surprised if the rules here change relative to both soc.sec. and medicare.

 

[FIRE'd@51]

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.

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.

 

[whitestick]

Well by your logic, then having any income at all, if taxed, would defeat the benefit of that income! I'll still take my SS, even if I have to pay taxes on it.

The way I understand it, is that 85% of it is taxed, if you exceed the limit of 44K for a married couple.

Also, remember that the amount you earn in your IRAs is not counted as income, until you withdraw it. So only the amounts in the Taxable Accounts earning income(dividends, interest) would add to the $44K limit. Not the amount you withdraw from your taxable accounts!

I understand and appreciate the comments, and yes, although it's a good problem to have, nevertheless, I still will have that problem.
Or more specifically, in my taxable accounts I'll have significant short term capital gains, (a function of my options trading), that will exceed the amount I withdraw to use, but which will still be part of the AGI, as you point out. I'm just trying to minimize taxes as much as possible, and the combo of IRA withdrawels (whenever they occur), excess STCG on money going back into the taxable investing pool, pension, small amounts of Roth (too little, too late) and then SS with the supposed marginal rate jumping to 46% or so, I am trying to understand the ramifications of it all, and plan for the withdrawels.
I tried the calculaters on the other sites, but they seem to break when you add in the STCG at a higher rate then the required expenses. I know the obvious is don't incur the STCG, but the program I'm on, has a flow, and you don't want to break the rythem.
Anyway, the answers on the SS is what I was looking to find.
Thanks

 

[MasterBlaster]

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.

 

[grumpy]

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*15% is 46.25%

I admit I haven't been following this whole discussion as I am still several years away from earliest SS claim but I am having a problem with the third formula shown above. The way I do math, .25 + (.85*.15) does not equal .4625 (it equals .3775). The result you show is not consistent with the other two formulas. What am I missing here?

Grumpy

 

[MasterBlaster]

Grumpy:

That was a typo. It should read...

25 + (.85*.25) is .4625

I'll fix the original post so that I don't confuse anyone else

 

[New Thinking]

The other thing to remember is that the for each "threshold" UP TO 50% or UP TO 85% is taxed. It's actually the smallest of a three part test. For example under the second threshold (up to 85% of SS can be taxed), it is actually the smaller of:

1) 85 percent of the benefits; or
2) 50 percent of the benefits plus 85 percent
of any excess over the second threshold; or
3) 50 percent of the excess over the first
threshold, plus 35 percent of the excess
over the second threshold.

So, if you delay SS and get a much higher amount, you could greatly eliminate taxes under option 3. Let's say you were married and the first threshold is $32,000. You could earn up to $64,000 of SS before ever paying ANY taxes because SS counts at a 50% rate.

 

[MasterBlaster]

New Thinking:

That's the game plan for a delayed SS start. Be tax smart about how you take that SS income.

Also by by delaying your SS start you could spend down your stash. So for every extra dollar of SS income you get by delaying SS you could spend $25 out of your stash (using the 4% SWR rule).

 

[MJ]

Also by by delaying your SS start you could spend down your stash. So for every extra dollar of SS income you get by delaying SS you could spend $25 out of your stash (using the 4% SWR rule).

Besides collecting an increased monthly amount at 66 to 70, the above quote was going to be the 2nd reason for delaying my SS payments. Even though, the government took my SS contribution out of my salary, I don't have this strong urge to recoup my money as soon as possible since I am single and having no immediate heirs except nieces and nephews, to leave my estate to.

 

[donheff]

I have found this thread confusing. But to feed back what I think I am hearing:

If your taxable income will be leading up to or within the range that SS becomes taxable your net take home from each SS dollar received (or each additional other taxable dollar received) is less than the basic marginal tax rate would lead you to believe. So watch the situation carefull and plan your withdrawals and SS start accordingly.

But if you already have taxable income over the thresholds (e.g. pension and RMDs) then you can evaluate SS income in a straightforward fashion based on your marginal tax rate (ie. 25%, 28%, 33%). I am riht about the later, correct?