Good things come to those who wait to claim Social Security
By Roger Larson | 1st October 2007
It is going to be several years before this author reaches retirement age. Yet, the gathering of information is necessary to assist me with proper planning. One of those subjects which needs to be considered is that of Social Security. Karen Chan CFP, Consumer and Family Economics Educator with University of Illinois Extension, provides some thoughts on Social Security mistakes to avoid.
“That magic age of 62! You’re counting the months or years until you can begin collecting Social Security. But you could wait until you are 65, 66, even 70. If you wait, you’ll get a larger monthly check. Making the wrong choice could cost you money.
First, let’s review the basics. Full retirement age is the age at which you would receive the normal benefit, the amount calculated by Social Security’s basic formula. Full retirement used to be 65, but it is gradually increasing. It will reach age 67 for those born in 1960 or later. You can begin receiving Social Security benefits as early as age 62 (60 for widows.) For each month you delay collecting, you will get a larger benefit, up to the age of 70.
Knowing a few additional rules will help you avoid costly mistakes.
Filing for Social Security before full retirement age AND continuing to work could backfire. If you earn more than $12,480 (for 2006, indexed annually), your Social Security benefit will be reduced by $1 for every $2 you earn over the $12,480 limit. Different earning limits apply in the year you reach full retirement age. In years after you reach full retirement age, your earned income has no impact on your Social Security benefits.
Un-earned income such as interest, distributions from IRAs, and profits from the sale of stock never affect Social Security benefits. But they may cause part of your benefit to be taxed. This is true for income from any source. Individual tax filers with “combined income” between $25,000 and $34,000 will pay income tax on 50% of their Social Security benefits. If their combined income is above $34,000, up to 85% of Social Security benefits is subject to income tax.
Joint filers may have to pay taxes on 50% of benefits if they have a “combined income” that is between $32,000 and $44,000. For combined incomes is over $44,000, up to 85% of Social Security benefits are subject to income tax.
“Combined income” includes all earned income, all interest you earned even if it’s exempt from federal income tax, investment income, distributions from regular IRAs and most employer retirement plans, and ½ of your Social Security benefits. In tax terms, it’s your adjusted gross income plus nontaxable interest and half of your Social Security benefits.
Some retirees have decided to begin taking distributions from their IRAs and retirement plans before the age of 70-1/2 when they are required to start. If they waited until 70-1/2, the larger balances in their accounts would result in larger annual distributions and more of their Social Security benefits being subject to tax. By taking distributions earlier (but not before age 59-1/2 when a 10% penalty would probably apply), they hope to smooth out their income and keep it below the thresholds that would cause 50 or 85% of their benefits to be taxed.
“Bunching” your income is a strategy that might reduce or avoid tax on Social Security benefits in alternate years. By structuring your income to have more in one year and less the next year, you might only pay tax on Social Security benefits every other year, instead of every year. However, bunching income could also push you into a higher tax bracket in those years. Check to see how much additional income you could have before hitting the next tax bracket. Or, check with a tax planner to determine whether this strategy would work for you.
You can get more information to help you make the right choice for you by going to the Plan Well, Retire Well: Your how-to-guide at: www.RetireWell.uiuc.edu.”
For other consumer-related questions, call the Peoria County Office at 309-685-3140 or visit us on the web at www.extension.uiuc.edu.