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The Social Security Tax Trap

The Social Security Tax Trap

Clear Direction for Your Retirement: The Social Security Tax Trap

I hope you all had a great Thanksgiving (despite the price increase of just about everything). Also, from our family to yours, I want to wish you a joyous Christmas Season and a happy and prosperous New Year. Christmas is really about the birth of Hope and I truly pray that you experience that Hope personally. 

This month’s topic revolves around a popular conversation in today’s financial arena, taxes! With legislation containing huge tax implications for our country 

(that would be you) still working through Congress at the time of this writing, it’s an important topic and becoming more important by the day as we learn more of the details. 

Last month, I wrote about social security solvency. This month, I want to discuss the social security tax bomb that is hidden to some extent. From the context of finan-cial planning for retirement, it’s something you don’t want to ignore and in some cases, something you simply can’t avoid. 

Assuming a taxpayer filing married joint, when your taxable income (social security, IRA distributions, dividends and interest, long-term gains, employment) on your form 1040 exceeds approximately $70,000, the bomb is unavoidable. The bomb is that 85% of your social security benefits are now going to be taxed. 

More and more people are getting caught in this trap. Why? I’m glad you asked. While the tax code is adjusted for inflation,the social security thresholds for paying taxes on those benefits haven’t been updated since 1994. Therefore, just by nature of inflation, more people are getting caught in the trap. Could the government change this, yes, but the bigger question is why they haven’t.

I’ll leave that to you to remedy at the voting booth.  

As I mentioned last month, lawmakers don’t always consider the consequences of the decisions they make affecting our finances. In 1960, the Supreme Court ruled that people have no property rights to their social security benefits. So, you’ve been paying in your entire life but the government could at any time arbitrarily reduce or even eliminate your benefit. Having sound fiscal leadership in Wash-ington is crucial to millions of American’s both current and in the future. Political rant over.

So, what do you do? What’s the key to avoiding this tax bomb on your social security benefits? The answer is to address it as early as possible in your retirement planning process. There’s just no substitute for solid, fiduciary financial planning. For some the additional tax is unavoidable, but in most cases if addressed early enough, you can make adjustments today so that later you’re not paying through the nose. 

One specific way to help mitigate this risk is Roth conversions! It is true that conversions are not always appropriate for everyone. Just like anything else, it depends on your unique financial circumstance. However, outlining a strategy of annual conversions could be one of the best tools to help alleviate the problem. Other income from areas such as life insurance or brokerage account principal are also ways to help keep the income you need below the threshold. Really any income that doesn’t hit your bottom line taxable income is a huge advantage in controlling tax flexibility in retirement but most of these take time to get into place properly. 

The lesson here is that you must to be the master of your retirement destiny. Get some help! Retirement success is not going to happen by osmosis. Again, it starts with planning and hopefully preparing as much as possible in advance. If you don’t know where you’re going, you’re probably already there. 

I hope this is helpful to your retirement journey. Call us, come see us or visit us at www.woottonfinancial.com, we’d love the opportunity to help address your questions and concerns and provide you Clear Direction for Your Retirement®. 

Investment Advisory services offered through Game Plan Advisors, Inc., a registered investment advisor. Insurance services offered through Wootton Financial Group, Inc. Game Plan Advisors, Inc. and Wootton Financial Group, Inc. are affiliated through common ownership. Neither Game Plan Advisors, Inc nor Wootton Financial Group, Inc. offer legal or tax advice. Please consult the appro-priate professional regarding your individual circumstance. Not associated with or endorsed by the Social Security Administration or any other government agency.
Please consider the investment objectives, risks, charges, and expenses carefully before investing in Variable Annuities. The prospectus, which contains this and other information about the variable annuity contract and the underlying investment options, can be obtained from the insurance company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
The investment return and principal value of the variable annuity investment options are not guaranteed. Variable annuity sub-accounts fluctuate with changes in market conditions. The principal may be worth more or less than the original amount invested when the annuity is surrendered.
Fixed Annuities are long term insurance contacts and there is a surrender charge imposed generally during the first
5 to 7 years that you own the annuity contract. Withdrawals prior to age 59-1/2 may result in a 10% IRS tax penalty, in addition to any ordinary income tax. Any guarantees of the annuity are backed by the financial strength of the underlying insurance company.
Indexed annuities are insurance contracts that, depending on the contract, may offer a guaranteed annual interest rate and some participation growth, if any, of a stock market index. Such contracts have substantial variation in terms, costs of guarantees and features and may cap participation or returns in significant ways. Any guarantees offered are backed by the financial strength of the insurance company. Surrender charges apply if not held to the end of the term. With-drawals are taxed as ordinary income and, if taken prior to 59 ½, a 10% federal tax penalty.  Investors are cautioned to carefully review an indexed annuity for its features, costs, risks, and how the variables are calculated.
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