A Social Security Safety Net by Karla Hopkins

FDR said Social Security was not intended to be the only means of support for the aged but rather a Social Security safety net.  Many today though regard Social Security as a major part of their retirement funding.

In 2009 the poverty rate for people over age 65 was just under 10%.  Without Social Security, the rate would be 45%.  Today, members of the Baby Boom generation are beginning to turn 65 and this group, which is known for spending and not saving, will put a strain on society and the Social Security system.  Today’s need for a Social Security net is as great as it was during the Great Depression.  The difference is that this time the Social Security system’s ability to pay full benefits beyond a 25-year horizon is doubtful. 

Some projections indicate that by 2036 the system will only be able to pay benefits at a 77% rate rather than a 100% rate. Therefore, when you prepare a long term budget, you should be conservative and assume your benefits will only be 75% of the amount calculated.

Taxation of Social Security benefits began in 1983. The dollar limits that determine the taxable portion of Social Security have remained constant such that many must pay income tax on their benefits.  So how do you minimize the taxation of your benefits?

First, you must understand the rules.  In general, an individual or married couple adds one-half of their Social Security benefit to their modified gross income.  If the total exceeds $25,000 for a single person or $32,000 for a married couple, 50% of the Social Security benefits are taxable.  If the total exceeds $34,000 for a single filer or $44,000 for a joint filer then 85% of your Social Security benefits are taxable.  Planning for receiving Social Security benefits could reduce or eliminate taxation of the benefits for some.

A few planning ideas to reduce your income each year when collecting Social Security follow:

You may be able to begin taking distributions from other pretax retirement accounts before turning 70 ½.  Doing so could reduce the required distributions once you turn 70.  You may also want to wait until you are 70 to begin taking Social Security benefits. This could increase your benefit by 8% per year.  The higher Social Security benefit will offset the lower required minimum distribution from another pretax retirement plan that you may be required to take.

Additionally, you could convert taxable IRA’s into Roth IRA’s. You will pay tax now, but at retirement age you  will not be required to take a minimum distribution from a Roth IRA, nor are any of the distributions taxable if you are over age 59 ½.  To calculate the amount of IRA that you convert, calculate the maximum amount that does not increase your marginal tax rate in the year of the conversion. 

Also, you may wish to reposition your after-tax investment portfolio by investing in more growth oriented stocks.  Using your pretax portfolios for income generating investing can help reduce your adjusted gross income.  Carefully planning your capital gain and loss recognition can also minimize your gross income. 

Other issues to consider when planning for Social Security include when to begin benefits, any government pension offset and divorce issues.  It is never too early to think ahead to your retirement years and the taxes that can be avoided or deferred with good tax planning.