Will YOU be Subject to the Social Security Tax Torpedo?
Vložit
- čas přidán 6. 09. 2024
- Do you have a tax-efficient retirement income strategy that avoids the Social Security Tax Torpedo? You can schedule an appointment with one of our Retirement Experts to look at your situation and help you plan for your future. Call us at (920) 544-0576 or go to www.safeguardi....
If you don't know exactly how Social Security is taxed, we highly recommend watching last week's video as it will make certain parts of this video clearer - • How is Your Social Sec...
Will you be subject to the Social Security Tax Torpedo in retirement?
This is a question many retirees don't readily know the answer to. And yet, the Social Security Tax Torpedo is one of the most common (and destructive) tax hurdles a retiree will face.
Almost every retiree will be subject to this tax trap at some point in retirement.
Yet, many advisors and retirees don't readily plan for this tax trap. This is a mistake. Social Security's Tax Torpedo will raise your marginal rate by 50%-85%.
Many think as they start pulling income from their taxable sources, they will first be taxed at 10%, then 12%, then 22% and so on.
Intuitively this makes sense. These are the normal federal income bracket rates.
However, many retirees will never see the 10% and 12% brackets because the Tax Torpedo.
What's worse, the Tax Torpedo becomes much more destructive in 2026 and beyond. Why? We explain why in this video.
In this video we lay out exactly how the Social Security Tax Torpedo is created and it's implications for your retirement.
We discuss:
✅ What is the Social Security Tax Torpedo and how it raises your marginal tax rate substantially in retirement?
✅ How to avoid the Social Security Tax Torpedo becoming subject to Social Security double taxation
✅ How to read a tax torpedo marginal graph and make the right withdrawal decisions based on your marginal tax rate
#retirementincomeplanning #socialsecuritytaxtorpedo #avoidingtaxesonsocialsecurity
- - - - - - - - - - - - - - -
Always remember, "You Don't Need More Money; You Need a Better Plan"
🍿 Subscribe to our channel: www.youtube.co....
🏆 Join our 'Retirement Mastery' Facebook Group: bit.ly/retirem...
📈 Talk with us about your retirement plan here: www.safeguardi...
📚 The New 60/40: How the Next Generation of Retirees Can Achieve Radical Financial Freedom through Better Safe Investing - www.amazon.com...
Safeguard Wealth Management is a Registered Investment Advisor in the State of WI. Safeguard Wealth Management is not an insurance provider. All content on CZcams is for informational purposes only and should not be taken as personal advice for your situation. You can read more disclosures at www.safeguardi...
Good discussion. I accidently stumbled on this trap a month ago when doing what-ifs using turbo tax. I'm on SS currently but have no RMD this year. As my other taxable income was very low I thought that I could transfer some income into this year by taking non required distributions from my IRA. What I discovered is that withdrawing each dollar from my IRA increased my taxable income by almost $2. So effectively I would be paying taxes at twice the nominal rate. A rate higher than the existing upper bracket. If you look at at the red and blue lines on the graph it is apparent that the effective rate once SS becomes taxable up until the point that you have maxed it out (85%) your effective tax rate has doubled (currently 22 - 41% and in 2026 25 to 46%)
Yes I been doing the same thing to determine how much excess RMD to take in 2021 without increasing my taxes. Been using k-1s in my taxable account and spending cash to keep my taxes down at least for a while.
Hi. Do you have a video on working full time and drawing social security after full retirement age. Thanks.
Confused on the math , here. I understand that a high income retiree will be subject to Federal tax on as much as 85% of the Social Security benefit. Isn't is equivalent to any other income though. Taking a 22% rate and then adding 85% of 22% and calling it a 40.7% rate seems like an odd calculation.
It's not equivalent to other income based on how Social Security becomes taxed. Normally when you withdraw $1 of income and its taxed at 12%, you get $.88. Fairly straightforward.
In this trap, $1 of IRA/pension/etc. income caused $1.85 of taxable income. The extra $0.85 moved from untaxed S.S. to taxed. At 12%, that $1.85 of taxable income costs you $.222 of taxes. You took out $1 of income and paid $.222 of taxes giving you a 22.2% tax rate.
I see that there is zone that the ira $ is enough to convert the SS $ from untaxed to taxed. In my case, I’ll be reliant on my IRA/401K for relatively large withdrawals of about $140K per year and then $60K in Soc Sec to generate $200K . I’m resigned to the fact that 85% of the 60K will be taxable and I’ll pay tax on $191K . To me,its Just like it was earned income before I retired. At least I get the 15% break and won’t have to pay state tax on the soc sec amount in MD.
It's not double taxation.
You guys are on your way. This content is top-level financial content. Thanks!
Thanks Bonez1999!
I am 25 years old right now. If I wait 44 years before claiming Social Security, and the laws have not changed, I expect inflation to quadruple my Social Security benefit versus examples you are showing. At that point does Social Security alone push me through the tax tour, Pido? Is it at that point beyond my control?
A big deal for guys who contributed a lifetime to 401ks. Most of my contributions were to a Roth. And may continue that way due to this tax issue. I can do either Trad or Roth.
To clarify, social security benefit is not included in 'income from taxable sources', correct? Income from taxable sources would be pensions, withdrawals from a tax deferred account, income from K-1s, interest, LTCG, etc, correct? And, does the torpedo section stop at the higher income from taxable sources?? Thank you. I subscribed :)!
What is the tax rate if you are still working and collecting social security
I would love to see a spreadsheet that demonstrates where this Tax Torpedo hits. If I receive $54,000/yr ($3000/mo, plus $1500/mo for spouse), when do these torpedo's hit as I draw from my 401k, in $6000/yr increments?
Get some turbo tax and play what ifs. If you care about where the numbers go you can print out the forms and have at it.
Nothing has yet to be said about working and collecting. An employer's wages would be considered part of the provisional income. Is this right?
I still don’t get this torpedo concept. Double taxation or not, I always thought most of people (at least around me) need to pay taxes for up to 85% of ss benefit amount after retirement. I just thank IRS for not taxing 100% of my ss benefits 😜Having said that, there is no torpedo to me. Once you consider your ss benefits as a taxable income, no torpedo to me.
But, sure for some people who don’t want to pay any tax or minimal tax on their ss benefits after retirement, this video totally makes sense, and if there is a way, definitely we should try.
You can pay no income tax if you take SS at 62, spend your cash and let it build back up in your deferred accounts. Yes when RMDs kick in it might be a different story. Enjoy it while you can. I use k-1 income in my taxable account to pay no taxes on that income today.
It would be clearer to state that 85% of your SS is taxable at 22%. Going from tax free SS to taxable as regular income SS could quite a surprise, so knowing this is going to happen is valuable information.
@@mikespangler98 its just added to your taxable income and taxes are paid or not. You can end up in one of seven different federal income tax brackets - each with its own marginal tax rate - depending on your taxable income. 0%, 10%, 12%, 22%, 24%, 32%, 35% and 37%. The standard deduction gives one more earning room! Its about 30k!
So even if you have a portion of SS taxed, you may still pay no income tax! Like me! I just try to keep my income under the break out. TTax makes it easy to figure out ahead of time. The first 30k income is on the house.
Sorry but a lot of vagueness here. I know you explain red and blue lines in the charts but perhaps putting that in writing on the chart as well? You have the room. Just a suggestion before I subscribe.
If I have lots of carryover capital gains loses, does new capital gains make a difference if your got the -3000 on the net. You are one lucky investor if you arrive at retirement with no carryover losses that will last the rest of your life. I use k-1s in my taxable account for income and defer gains to maybe my heirs.
What is a k-1?
Can you answer a question for me? What if you take just pension at a higher rate with delayed social security until 67, then pension drops down once you start taking SS. I know this is to reduce taxes prior to NSSRA. How is the straight pension, 401K taxed? I'm sorry if there is already a video on this, and I haven't seen it.
Lump sum a pension and most likely it's rolled into a Traditional IRA, right? Now you have to try and convert before taking Social Security, and RMD'S. Seem like it could be a problem depending on your time frame and how much you already in a Traditional IRA.
It's highly dependent on a person's situation. Lump summing should be analyzed from a few different angles but generally, we find a conversion strategy is more optimal than forced taxable income. Cue the disclaimers now... :)
Why do I have to pay taxes on money that I already paid taxes on? I thought Social Security was money I already paid into. Now the IRS wants a piece of that too?
Always great , thanks so much.
Many pensions will not give you the employer contribution if you take a lump sum. The haircut from a lump sum could be really huge. You'd never be able to repurchase an equivalent annuity from just the employee contribution given to you in a lump sum.
Thanks for this
My 99 year old father finally hit ss tax torpedo with just ss and pension. Now inflation adjustments to ss will be taxed. Young people with moderate income can’t avoid tax torpedo unless rules change with current inflation rates. Ss Tax torpedo planning not pertinent for younger people or those maximizing ss .
very interesting.
I just think that this is not relevant to the average retiree. A married couple drawing $65,000 in Social Security would be very well to do. And their “40.7%” bracket wouldn’t start until they had $60,000 of other income to trigger it. Not too many people in the heartland are living off of $125,000 a year. This torpedo is pretty easy to avoid , just sayin’
I agree Scott ! Even if you are going to be converting to ROTH larger amounts now to avoid the large tax later when at RMDs age, it still makes sense. There seems to be alot of concern with paying tax on social security! It really is going to be very small amount now compared to later when a sizeable IRA becomes taxable taking RMDs.
John, I appreciate your point of view but have to disagree for quite a few reasons. Here are few described below:
1. The Torpedo isn't just the 40.70% part but rather the whole zone where you are double taxed. If you think you're being taxed at 12% but are actually taxed at 22.2%, your marginal rate is rising significantly either way. To avoid the torpedo completely, you need to be under the standard deduction for taxable income.
2. Everyone has different goals in retirement and a different situation. Single filers will see the Torpedo start at much lower income levels. We meet many retirees who live in or outside of the heartland and do want to take a six-figure income in retirement. If we are going to plan for the masses, most retirees can only afford to live off Social Security and will see their benefits taxed at 0%. That doesn't help a whole swath of people that have accumulated wealth into retirement.
3. Oftentimes, it doesn't matter what the income goal is. Someone may be outside or in the minor part of the Tax Torpedo and then RMDs start and are now forced into the major zones.
4. Everyone will slowly drift further into the torpedo because of the Tax Cuts and Jobs Act expiring and stealth taxes. We have a few trainings on this coming out soon.
From personal experience in our practice, there hasn't been a person that we've built a plan for in the past two years that wouldn't be subject to the Social Security Tax Torpedo in a major way. Now, there is plenty you can do to avoid this predicament but only if you can accurately identify the problem.
@@SafeguardWealthManagement I still submit that this is irrelevant to the average retiree. Take the example of the couple who get $65,000 per year in Social Security. If they need $100k per year in retirement, we’ll then first of all congratulations and shut up about the taxes! Lol But, taking 15,000 from a traditional Ira and 20,000 from a Roth IRA will get them there. Now let’s see….. 1/2 of their SS is $32,500 plus 15,000 from the traditional Ira = 47,500. So, 8,975 dollars of their Social Security is counted for taxes. Gives them a taxable income of $23,975 which is lower than the standard deduction. So , no tax on $100,000 of income. Even if they didn’t have a Roth IRA, they could have $80,000 of income with no tax. When the average person is collecting $1600 per month in Social Security and 40% of the population is living off of JUST their Social Security, you can hopefully see why I said this is irrelevant to most people. It may be helpful to those such as myself who have net worth’s in 7 figures but most of us already have this figured out. Thanks.
@@SafeguardWealthManagement As in number 3 from Safeguard, it is pretty much too late to do anything once the RMD's start other than give it away!
@@DaveAngelini I agree. Much more difficult to deal with this situation after RMDs. That's why it needs to be dealt with prior to RMDs
Do you have rather can I have your office phones number.Are you located here in MN..one representative that I can schedule with.
👎👎 I am out