“If you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return),” you may be required to pay federal income taxes on your Social Security benefits depending on your combined income. However, there are still some ways you can minimize your income and reduce, or even eliminate, your tax responsibilities related to your Social Security benefits – including:
Consider A Roth Account
As soon as you start pulling money from your 401(k) or IRA after you’ve retired, you can expect to see your income go up, which is the primary reason withdrawals from 401(k)s and IRAs often put beneficiaries at risk of having their benefits taxed. That’s why, many beneficiaries only withdraw the required minimum distribution (RMD) and get the rest from Roth IRAs and Roth 401(k)s, which do not impact adjusted gross income. Be advised that there are still cons to this route as well, which is why you should always consult with a knowledgeable tax/legal professional about your needs and plans to come up with a financial strategy that best works for you.
Donate Your RMD To Charity
Making a “qualified charitable distribution” (QCD) can be a great way to avoid paying income taxes on your money, which means no boosted income and no taxed benefits. However, there are still some strict rules for how to properly complete a QCD. For instance, you have to “already be age 70½ on the date of distribution,” and “the money must be directed to a qualified 501(c)(3) organization.” Consult a tax advisor or your local legal representative to learn more about how and what you need to complete a QCD.
Reconsider Your Employment
Just because you might be getting older, doesn’t mean you’re out of energy and don’t want something to do. Before you consider picking up a part-time job to increase your social interactions, consider the tax implications. More money equates to more owed taxes, so if you can afford it take a break instead. Volunteer or find a fulfilling hobby; it will likely be more financially beneficial to you in the long run.
Avoid Municipal Bonds
According to the municipal bonds website, “when it comes to taxing Social Security benefits, tax-free municipal bond interest can become a ‘stealth tax’ that quietly eats away at income. Bondholders should be aware of these potential tax consequences when deciding between tax-free muni bonds and other kinds of fixed-income investment.” So, while you may be tempted by the allure of the bonds’ inability to be subjected to federal and state income taxes, just remember, it might cause more trouble than its worth.
Delay Your Benefits
Waiting until you have reached full retirement age, or even longer, is typically the best solution for avoiding paying taxes on your Social Security benefits. Plus, doing so means when you do start collecting, you’ll be able to get a bigger check every month. Just make sure that this option is going to be most suitable for you ahead of time by consulting a legal or financial professional you trust.
As always, our esteemed Social Security disability attorneys at Esper Aiello Law Group are always available to answer any questions you may have, or help you devise an exceptional strategy to ensure long-term financial success – all you have to do is ask! Call us, today, at 313.964.4900 or fill out the form in the sidebar or on our contact page, and learn more about how we can help you.