I have a question about minimizing taxes on SS benefits in retirement. I'm 60, plan to retire at 65, have > $1M in savings, adding about $26K annually. Savings are a mix of 401Ks, IRAs, mutual funds and bank accounts. Mortgage was paid off years ago, kids are grown and doing well and I'm annoyingly proud of them. Let me use some numbers that will illustrate my question, with the understanding that they would change by the time I retire.

We expect to get about $40K in SS benefits annually.

The SS threshold is $32K, calculated as half of SS benefits plus taxable income. Let's say we need about $90K/year and standard deduction is $12K.

It seems that the best withdrawal strategy would be to spend about $26K from bank accounts and mutual funds for which taxes have already been paid, and then withdraw about $24K from taxable IRA/401K accounts. This makes the taxable income for SS benefits $32K ($20K + $24K - $12K standard deduction) which is below the SS income threshold, making SS benefits 100% non-taxable.

Of course, this isn't exact, other deductions affect it, and we might want to take more out of tax-deferred accounts in years with a lot of gains, to capture the gains (even though it means paying some taxes). And it only works until all the non-taxable savings is used (although any unused 401K/retirement withdrawals can be banked and become future non-taxable savings).

Did I get this correct? I'm thinking this could be of interest to a lot of people.

Thanks

Terry Says:

First, you need to consult a tax advisor about your personal situation.  BUT, keep these things in mind:

  1.  You don’t get to decide how much you take out of your retirement accounts each year.  You will be REQUIRED to make a minimum distribution each year, based on the total value of your assets at the previous year end.  That starts at age 70-1/2.  And those withdrawals will be taxable.  And there is a HUGE penalty if you don’t withdraw the proper amount each year.
  2. The only way to minimize taxes on Social Security benefits is to delay taking them!  You can’t be taxed on benefits you don’t get!  But once again, you MUST start taking benefits when you reach age 70 — and those benefits will be larger because you delayed taking them (a good idea).
  3.  You have no idea what the tax laws will be in 10 years.

So when you consult your tax advisor there will be a lot of options.  If you have after tax-savings outside your retirement accounts, you might even want to use it to pay the taxes next year — especially if there is a tax cut — and roll some retirement money to a Roth.  But all this needs to be carefully analyzed.   You might search for a Certified Financial Planner who is also a CPA with expertise in IRAs.  Search at www.IRAHelp.com.

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