InsuranceNewsNet Magazine, September 2011
Today someone in America is retiring. In fact, starting this year some 10,000 individuals a day are retiring. Those in the boomer generation are now making decisions that will have a lasting impact on this next phase of their lives. These individuals will have a higher income than their parents did, and for the most part, they will have a higher education level.
Social Security History
For married or head of household:
- Social Security can become taxable when income plus half of the amount received from Social Security exceeds $32,000—up to 50 percent of Social Security benefits.
- If the amount exceeds $44,000, up to 85 percent of Social Security benefits can be taxed.
For a single person:
- Social Security can become taxable if income plus half of the amount received from Social Security exceeds $25,000—up to 50 percent of Social Security benefits.
- If the amount exceeds $34,000, up to 85 percent of Social Security benefits can be taxed.
- IRA distributions
- Certificates of deposit
- Money market accounts
- U.S. Treasury bills
- Mortgage certificates
- Capital gains
- Tax-free bonds
- Corporate bonds
- Half of Social Security
Income from any combination of these accounts added to half of Social Security results in a “threshold income” that determines the tax that may have to be paid.
Table 1 shows income levels at which Social Security would be fully exempt. This is subject to inclusion in taxable income at the 50 percent rate and at the 85 percent rate. An example is listed below for a couple and single retiree with an average level of benefits. Total income refers to the combination of taxable source income and Social Security.
When income is deferred instead of taxed, it reduces provisional income and may lower amounts below the allowed thresholds.
Individuals planning retirement may want to evaluate their current risk tolerance to see where their finances would fit best.
They may find that a CD is a conservative investment but not be happy with the low interest rate. They might like the potential return on stocks but not the threat to principal.
But you can ask them, “If you could participate in growing your principal and provide the protection from the risk of stocks, you would be interested, right? You may be able to do this by repositioning the assets that have created a tax on your Social Security.”
By repositioning Gary and Lisa’s 1099 assets (that created taxable income) into a deferred annuity, the tax of $1,913 on their Social Security was eliminated.
Gary and Lisa did not withdraw the $20,000 taxable interest they earned from their 1099 assets; rather, they had the earnings roll back into the assets. They were forced into taking money from their monthly retirement checks to pay the tax on this 1099 income that they did not access.
Interest earned within a deferred annuity (and not withdrawn) may eliminate or reduce the income tax on Social Security and could increase net retirement income. And in many cases retirees can access up to 10 percent of their funds each year without a penalty, depending on policy provisions.