Proper word for how we get Social Security?

[Gumby]

Yes, I agree, and that's what I'm talking about. The extra $1 can have a large marginal rate, but it's not going to cost you more than that $1

My understanding as well. Once you exceed $32k combined income, each dollar results in taxation of 50 cents of SS. So at 44k combined income (for MFJ) $6K of SS is subject to taxation. Past $44k, each increased dollar results in taxation of 85 cents of social security until you get to the maximum of 85% of the total.


So, assume you are just 1 cent below the $32K combined income. Your actual income is $36k in SS and $14k in other income (assume a pension). You take the standard deduction of $24k. Your taxable income is zero and you owe no tax on $50k actual gross income.

Let's look at three withdrawal scenarios

1. ) Same as base case but you withdraw $9K from your IRA, putting you over the combined income test by $9k. Each dollar of income over $32k subjects 50 cents of SS to tax. So, your AGI is (50% of ($39k - $32k)) +$14k pension + $9k IRA withdrawal = $26,500. You take the $24k standard deduction, so your taxable income is $2500 and you are in the 10% bracket. Your tax is $250.

2.) Same as base case, but now assume you take $12k from your IRA/401K, reaching the top of the SS taxation phase in band. Your AGI now equals (50% of $12k) + 14k pension + $12k IRA withdrawal = $32k. You take the $24k standard deduction, so your taxable income is $8k. You are in the 10% marginal bracket and you pay $800 in tax.

3.) Same as base case, but now you take $20k from your IRA. Now, $6k of your SS plus 85% of the amount over $44k combined income is subject to tax, up to the maximum of $30,500, which is 85% of $36k). So your AGI is (50% of 12K +85% of $8k) + $14k pension + $20k IRA withdrawal = $46,500. With a $24k deduction, your taxable income is $22.5k. Your tax will be $2319.



In this scenario, you will actually reach maximum taxation of social security when you withdraw a total of $40,941.18 from your IRA. (50% of $12000 + 85% of $28,941.12 = $30600). At that point, your AGI will be $30.6k SS + $14k pension + $40,941 IRA withdrawal = $85541. With a standard deduction, your taxable income will be $61,541 and you will be in the 12% bracket. Your taxes will be $7004.

From this point on, there is no difference to the taxation of a marginal withdrawn dollar. For comparison, now assume SS taxation suddenly went away. Your AGI is reduced by $30,600 and your tax by $3672. That is the maximum affect of the SS add in.

Obviously, there will be slight variations depending on the actual SS received, but you should get the picture that it is a limited dollar impact.

 

[VanWinkle]

That is only true because of a lot of misleading information about the “Break Even” calculations for Social Security benefits. If your full retirement age is 66 where you will get 100% of your benefits, your age 62 and 1 month benefit is 75.42%. Yes if you compare $7,542 to $10,000, or any other numbers at that ratio, your break even will be between ages 77 and 78. But these numbers do not reflect reality!

Let’s say that you were earning an inflation adjusted earning of $60,000, slightly upper middle class! Yes the 62 vs 66 benefits are $19,179 vs $25,429 and break even on the GROSS income is around age 77. But, if you want a lifestyle with an after Federal tax income level of $48,000 you would have to get taxable income of $32,196 for the lower tax deferred benefits level and only $24,572 for the higher tax deferred benefits. Your Federal taxes due would be $3,375 vs only $2,001. If you compare your NET Federal income, Social Security benefit minus Federal Taxes, ($19,179 - $3,375 =) $15,804 vs ($25,429 - $2,001 =) $23,428, your break even drops 4 years from 77 to 73. We all live on NET income, not GROSS income!

If you use a higher income level, say $80,000 earnings with a lifestyle of $60,000, the 40.7% marginal tax hump gets involved and the break even drops even more, down to only age 71.

This was explained to me at one of those FREE retirement information dinners. If you delay your Social Security benefits by spending down your 401K/IRA early in order to get a larger guaranteed income for the rest of your life, and you die during the spend down period, “You had enough money to last you the rest of your life!” Not doing this, if you live past age 90, you might go broke!


The choice is yours!

This part makes me ponder what the advantage was for the Broker at the retirement seminar........ who knows, maybe he is just a very nice guy.