Where It Fits in Your Overall Retirement Plan
When Social Security was created, it was intended to be a safety net for workers in a nation that was reeling from the Great Depression. Over the decades, it evolved into the main source of income for many retirees, especially women, who were less likely than men to qualify for employer-paid pensions. Times have changed, and demands on Social Security are straining the system, especially because of Baby Boomers who will be retiring in the near future.
As you’re planning your retirement finances, a more realistic goal is for Social Security to provide 15-25% of your retirement income, with the rest coming from your employer-sponsored retirement plan, investments, your savings, and, yes, continued employment.
One of the changes that had significant impact on an individual’s Social Security benefit is the Revenue Reconciliation Act of 1993, which imposed additional income taxes on Social Security benefits, effectively reducing benefits for many middle-income retirees. This was done by increasing the tax rates on Social Security benefits based on an individual’s provisional income.
Provisional income generally includes:
- Earned income (W2)
- Income from pensions, 401(k)s, and Traditional IRAs (1099R)
- Taxable interest and gains (1099)
- Tax-exempt interest
- 50% of Social Security benefit
There are ways to reduce the tax bite on provisional income. The key is to maximize Social Security benefits by implementing financial strategies that reduce provisional income. Two strategies could possibly reduce provisional income and effectively increase Social Security benefits by reducing the taxable amount.
The first strategy is to move some of your taxable income-generating assets into an annuity. With this strategy, the income earned within the annuity is not included in the provisional income until it is withdrawn. This assumes that you do not need those assets for current income.
The second strategy is to convert all or part of a Traditional IRA to a Roth IRA. This assumes that paying taxes now on retirement assets makes sense in light of longer-term goals of tax-free income and relief from required minimum distribution rules.
Contact your Western & Southern Life representative for help in determining which course of action may be to your advantage.
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Western & Southern Life does not provide tax or legal advice. Please contact your tax or legal advisor regarding your situation.
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