Your Financial Future: The nuances of Social Security benefits
It has been widely reported that the first person to receive Social Security was Ida May Fuller. She worked for three years under the SS program, and paid $24.75 in payroll taxes. Ida lived to be 100 and collected $22,888 in Social Security benefits.
She also lived much longer than most people at that time and received a huge return on her investment. While most people do get this ROI, people who live a normal life time do get a good return.
Social Security is an important retirement asset for many people. But, it does receive a little different tax treatment. When you contribute to an IRA or 401(k), you get a tax deduction. When you pay SS taxes, you do not. Yet SS payments may be taxable when you receive them. If you file taxes as an individual, and your provisional income is below $25,000 you pay no federal taxes on your benefit. If between $25,000 and $34,000 the taxable amount is 50%. Above $34,000, 85% is taxable.
Couples get little higher totals, but it is not double the individual tax rate. Provisional income is half of your SS income and all of the rest of your income added together. A major mistake that people make when deciding when to start Social Security income is not considering the effect that this income has on their other taxable assets. With proper planning, you may be able to pay taxes on qualified money or capital gains at a lower tax rate.
Social Security considers your highest 35 earning years when calculating your benefit. Sometimes people ask if working part time after retirement will hurt their SS benefit. The answer is no because you are ether replacing a lower earning year or it does not count. Even if you are collecting SS, you still have to continue to pay the tax on earned income. If this does not replace a lower earning year, this additional tax does not increase your benefit.
Sometimes there is confusion about spousal benefits. If you have been married for at least nine months you may be able to collect a spousal benefit even if you do not have your own earnings record. If you have reached full retirement age (FRA), you may be entitled to half of your spouse benefit at their full retirement age. If you start receiving benefits before your FRA, you will get a reduced amount for life.
To collect a spousal benefit, your spouse must have filed for their own benefit. The only exception is someone who has been divorced for at least two years. People born in 1953 or before have a special opportunity. They may be able to file a restricted application. This means they can file for spousal benefits at full retirement age and have their own benefit continue to roll up at 8% a year until age 70.
Everyone born in 1954 or later must receive their own benefit first. Then if half of their spouses FRA is more than their own total they will receive the amount necessary to bring the total to 50%. Delayed benefits for waiting from your FRA to age 70 are not considered when calculating spousal income. They do count for survivors benefit upon the death of one spouse.
Good Social Security planning can make your retirement more enjoyable. Make sure you collect information and consider all of your options.
Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, 鈥淵our Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.鈥� If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.