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Planning Matters Radio / Peter Richon

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September 23, 2023 10:00 am

Many retirees are surprised to learn that above a certain income, Social Security is taxed. In retirement, it's important to know how all your income streams will be taxed, and how to mitigate those taxes. In this video, Peter with Richon Planning explains 3 strategies to Erin Kennedy:

  1. Convert to a Roth IRA
  2. 2. Consider Shifting Income Investments
  3. 3. Delay Claiming Your Social Security Benefits

Another strategy to consider is a Qualified Charitable Distribution. Determining which strategy is right for you is a very personalized calculation, and it's something we specialize in at Richon Planning. For your detailed and personalized retirement tax plan, please give Peter a call at (919) 300-5886 or visit

#Retirement #WealthManagement #SocialSecurity #Taxes

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We want you to plan for success. Welcome to Planning Matters Radio.

Peter, good to see you. Today we are talking through three strategies to minimize your Social Security taxes. Many retirees are surprised to learn that above a certain income, Social Security is taxed. In retirement, it's important to know how all your income streams will be taxed and how to mitigate those taxes.

So let's start with the basics. How are Social Security taxes calculated? Yeah, double whammy, right? We paid into Social Security, it felt like a taxation during our entire life and working career, and then guess what? They finally give some of it back, but if you make too much, they tax it again. So there are a couple numbers to keep in mind. There are thresholds for this taxation, and the numbers are fairly low. They were put in place in 1983 and then another threshold in 1993, and they have never been inflation adjusted like many other thresholds where taxation is encountered.

So they have remained pretty low. For a married couple, it's 32,000 and 44,000 that you need to keep in mind. For a single individual, it is 25,000 and 34,000. Now, those thresholds, below that or if Social Security was your only income, no Social Security would be taxable.

Okay, fantastic. But most people can't live on just that amount alone or Social Security alone. So if you go over those thresholds, the lower one, up to 50% of your Social Security is not taken, it's not compensated as a tax, but it is included as taxable income. And then over the second threshold, again, married couple 44,000, 85%, up to 85% of your Social Security income itself is included in your taxable income. And now what makes up that taxable income? Well, it's just about everything, including half of the Social Security itself. So any kind of interest or dividends or withdrawals from retirement accounts, pensions, rental income, plus half of the Social Security, that all goes into the equation to figure out if the Social Security becomes taxable. And I love that you've got my superhero Scrooge McDuck up there on the visual, Aaron.

I love that guy. Although he probably did not keep his money in the best way to grow it because it was in that safe. Although if you wanted to avoid the Social Security taxes, just taking money out of the safe, that would not count. So there are a couple exceptions here.

We'll talk about that in a little bit. But yeah, you've got to look at all of the pieces and specifically your retirement accounts, ladies and gentlemen. Those yet to be taxed, tax deferred 401ks and IRAs and the like.

Those have your biggest tax liability in retirement and the biggest probability that they actually cause your Social Security to also become taxable, a double whammy. You're right. Scrooge McDuck and his bank vault of coins. I always thought that was the coolest thing when I was a little kid. Yeah, I loved that guy and still do. Again, probably not the smartest way to have kept his money for such a miser, though.

He could have been put in to better use me. What about interest, Scrooge? Come on. All right, so now let's consider converting your tax deferred accounts to Roth accounts as we talk through strategies. This is your first suggestion, right? Which is essentially, Peter, making sure that we are getting things off of this provisional income bucket. Right.

Yeah. Now, it doesn't get it off. It just does it proactively and ahead of time. Because when you make the Roth conversion, guess what? That's taxable and you've got to pay the tax to make the conversion. But if you do that ahead of time, before you are simultaneously claiming and collecting Social Security, well, now you have that Roth bucket of tax free assets that you can draw from. And if you create income from a Roth, that does not go into the equation for is your Social Security taxable or not.

So it is a great strategy. Couple that with I believe that we are probably in potentially the lowest tax environment and tax rates we will likely see into the future. Now, for this and many other reasons, Erin, is a good time to look at Roth conversions. Your second strategy, consider shifting income investments because some investments generate taxable income while others are non-taxable. Can you explain that, please?

Yeah. Well, I mean, again, kind of like Scrooge McDuck, if you've already got a pile of already taxed money, if you've got a bank account with $500,000 in it, you don't pay tax when you pull that out. You paid tax before you put that in.

Again, just like Scrooge, maybe not the best way to keep that money. But if you pull out already taxed, after tax money, it doesn't count. And then for the investments, I mean, you could have bond yields or dividends or interest that in other circumstances or with current investments may create taxable income where you could shift that to qualified dividends or bond yields, non-taxable bonds, that does not cause the Social Security, does not go into the equation to cause the Social Security to be taxable. So this is another strategy or shift that we could consider to maybe avoid that double whammy of the Social Security taxation interest or proceeds from loans also does not go into the equation. So a couple of different ways to look at that there. You mentioned there's another strategy related to this for those who are charitably inclined.

What's that? Yeah, so if you are charitably inclined, donating to your church, tithing, making contributions to a charitable organization, donations of any kind, and you are 70 and a half or above, well, then you might not like the taxation on the Social Security for one and the required minimum distribution or the IRA withdrawal might be causing it simultaneously, do not tithe or donate to your charity with that money that's in the bank, that after tax money. Use that as the income and then make your donation to your church, charity, or organization directly out of your IRA. It's called a qualified charitable distribution. It allows them the same benefit, 100% tax-free gift to them. It actually is one of the very few opportunities to have truly tax-free money for you in your lifetime.

You earn the money, you put it in the IRA, you saved it, you grew it, you never paid tax, you donate it, you don't pay tax on it at all whatsoever, and it doesn't go on to the income equation to see if your Social Security becomes taxable or not. So yeah, that's a great strategy as well. Thanks. Yeah, such a win-win. The last strategy would be delay claiming your Social Security benefits. Why is this helpful?

Right. Well, if we're over those income thresholds, it's not that it's going to avoid the taxation, but when you delay Social Security, the amount that you receive does increase each year you wait. So even if you are going to otherwise encounter those thresholds and taxable Social Security income, at least you are collecting more. So net-net, even after the tax, you should have more income or at least as much income by having delayed. So another good strategy that that not everyone can do and is not the perfect universal solution across the board, because I do think that Social Security should be used to protect your personal assets as much as possible. But if you've got the ability, if you don't need the additional income, then don't rush out to claim Social Security and cut yourself down in your benefit amount and have the taxation. In addition to that, like strategize on that to optimize the Social Security and the protection of your personal net worth and assets. Interesting. Clearly, a lot of proactive planning goes into this.

Peter, if somebody has questions about any of the strategies that we've discussed, what's the best way to reach you? Yeah, it is not a fast knee jerk rush out and get it as soon as you can decision. Work through it, ladies and gentlemen.

The difference in a good decision with Social Security versus a quick decision can be several hundreds of thousands of dollars over your lifetime that you either get from Social Security, you have to pull from your personal investments, or just isn't there at all. So make a good decision. Give us a call.

We work through this with our clients all of the time. Nine one nine three hundred five eight eight six nine one nine three hundred five eight eight six or you can visit online is what it looks like. It's my last name, Rashawn. All right, Peter, thanks so much. Always a pleasure.

And thank you. This has been Planning Matters Radio. The content of this radio show is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. You are encouraged to seek investment tax or legal advice from an independent professional advisor. Any investments and or investment strategies mentioned involve risk, including the possible loss of principal advisory services offered through Brooke's own capital management, a registered investment advisor. Fiduciary duty extends solely to investment advisory advice and does not extend to other activities such as insurance or broker dealer services. Advisory clients are charged a quarterly fee for assets under management while insurance products pay a commission, which may result in a conflict of interest regarding compensation.
Whisper: medium.en / 2023-10-07 03:57:36 / 2023-10-07 04:01:35 / 4

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