Taxation of Social Security Benefits

Taxation of Social Security Benefits

Keep an eye on your income amounts when claiming Social Security

Many people are often surprised to learn that once they are retired and start collecting Social Security that they may have to pay taxes on their benefit.  Throughout our working career we have probably all seen the money that gets deducted to fund Social Security. However, when you start drawing your Social Security benefit there is a strong likelihood that you will have to pay taxes on a portion of that income.  These numbers have not been adjusted for inflation and with higher balances in retirement plans and a rising stock market this can lead to more taxation. Also, with retirees taking part time work while on Social Security, those amounts can also increase income making more Social Security taxable. 

Calculation for taxable amount

The first step in determining whether any portion of Social Security is taxable is to calculate what they refer to as “provisional income.” This income is can be thought of as a combination of different income sources.  This income consists of:

  • Adjusted Gross Income
  • Any tax-exempt interest income, example municipals bonds
  • Half of any Social Security benefits


Once this amount is calculated it is then compared to the income threshold amounts. 

For single taxpayers:

            Income below $25,000 Social Security is tax free

Income between: $25,000 – $34,000 and 50% of the Social Security benefit is taxed

Income above $34,000 results in up to 85% taxable

For married filing jointly:

            Income below $32,000 Social Security is tax free

            Income between $32,000 – $44,000 up to 50% of Social Security benefit is taxed

            Income above $44,000 up to 85% of Social Security benefit is taxed

One thing to keep in mind is what is all included in your Adjusted Gross Income, by definition gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to your gross income includes, alimony, student loan interest, educator expenses and contributions to a retirement account. 

Here is a quick example of how the taxes would work on a Social Security benefit.

Steve and Mary have an AGI of $27,000 and also have municipal bond interest of $1,000. Their Social Security amount is $20,000 per year. Therefore, to calculate what amount may be taxable they would add $27,000 + $1,000 + $10,000(one half of benefit) = $38,000 of combined income. This is $6,000 over $32,000 threshold, therefore, $3,000(50% of $6,000) of their benefit amount is taxable.


One way that you could potentially reduce the taxes you pay on your Social Security benefit is to convert your pretax retirement accounts into a Roth IRA. This would need to be done before you start claiming your Social Security benefit.  This would cause you to pay taxes in the year that you converted, however, if this is before you start claiming Social Security this amount would no longer be included in your pretax account. As long as the Roth IRA is opened for a least 5 years, and you are over the age of 59.5 any withdrawal from that Roth IRA would not be included in income for that year. Therefore, this amount would not be used in the calculation for your taxable Social Security amount. 


Keep in mind you can check you Social Security statement which shows the amount of your future benefit by logging into







If you would like to schedule a call or zoom meeting to discuss a review of your investments Click Here



Link to Disclaimer

Subscribe to The Financial Incline

* indicates required

3 Savings Buckets & Why You Need Them

3 Savings Buckets & Why You Need Them

The tax treatment of investment accounts can oftentimes be overlooked by most investors. This plays a big role when it comes time to start living off of the nest egg you have built up when you enter retirement.  While we are working and saving throughout our career there are three different options for the ways we can save and invest our money. The three account types are: Pretax, Roth and Taxable accounts.  Due to the fact that the tax laws are constantly changing it is important to have these three buckets as you are preparing to live off your savings. Below I will describe each of these account options and why they are important.

Bucket #1 Pretax Savings

     Your pretax accounts would typically be any workplace retirement plans, these can include 401k’s, 403b’s, 457’s, Defined Benefit plans etc. These accounts are most often rolled over into a Rollover IRA and maintain that pretax status.  These accounts receive contributions directly from your paycheck without getting taxes deducted. If your employer offers a company match, those contributions are also pretax.

     The benefit of these types of accounts is that they lower your income taxes in the year you make the contributions. They also reduce the income tax for your employer’s who make the contributions for that year. This is beneficial for those working that may be in a high tax bracket right now. That is because the money they contribute now is not taxed and instead the money is taxed as you withdrawal the funds from your account.  By holding these accounts over the long term you are allowing your money to stay invested and compound throughout your career.  If you were to look at historical averages of the stock market, the longer this money is invested the higher likelihood that it will grow. The expectation is that when those individuals retire they will be in a lower tax bracket when they take the money out, therefore, creating a clear tax incentive to make contributions towards your retirement.

     What are some negatives:  If an investor only has pretax savings in retirement this could lead to significant taxes in retirement.  That is because every dollar that is taken out of these accounts is added to income and taxed in the year they are withdrawn.  If you include these withdraws with any other income in retirement this can place retirees in a high tax bracket for the entirety of their retirement.  We do not know what the tax brackets will be in the future and who is to say that they will not increase.  The way to reduce your risk of high taxes is to have other types of accounts to withdraw from that are taxed differently.

Bucket #2 Roth Savings

     Roth savings is money that is contributed into a Roth IRA or Roth 401k and is taxed upfront.  Theses contributions can then be invested in different stocks, bonds or mutual funds.  The key advantage of a Roth is that as long as this account has been opened for 5 years and you are over the age 59.5 all withdrawals are tax free.  The way to take full advantage of your Roth is to have this money invested over the long term to grow as much as possible. All of your investment gains can then be withdrawn from your account tax free.  This gives investors a different option in retirement and the ability to access savings tax free. This can ensure that you stay in a certain tax bracket in retirement and not continue to climb into higher rates by only taking taxable withdrawals.  This is also beneficial for those looking to pass on money to their beneficiaries.  For a complete resource for the benefits of Roth savings check out my prior blog post here.

     What are some negatives: The downside to Roth savings is the chance that you may be in a significantly higher tax bracket now than you will be in retirement. Therefore, you are paying the taxes early at a much higher rate then you would have to in retirement.

Bucket #3 Taxable(Non Retirement) Accounts

     Taxable/non retirement accounts is money that is placed into an investment or brokerage account. There are no contribution limits on the amounts that can be contributed. These accounts are typically free to invest in a variety of different investment vehicles. Taxable accounts qualify for capital gains treatment for tax purposes. That means that the money that you contribute has already been taxed, therefore, the only additional tax you would pay would be from gains on your investments.  The advantage of having these types of accounts in retirement is that the principal balance has already been taxed, therefore, if you only withdrawal that portion of the account you will not pay taxes again.  Also, any capital gains that you withdrawal experience different tax treatment and are not taxed at ordinary income tax rates.  This can then keep investors in a lower tax bracket by using this money to live off of in retirement.

     What are some negatives: This money is the least advantageous from a tax perspective because the money is already taxed when you received it from earnings or wages. The money is then invested and any of the gains you must pay a percentage of capital gains tax on. If you were to lose some of the money you invested you would be able to offset gains and use a portion to offset ordinary income.

Why do you need all three?

The chart above shows the current tax brackets for 2020.  The second chart shows what they were prior to the TCJA.   Tax brackets are a constant topic of conversation for our elected officials and are changed often throughout history.  It is important to have all three buckets for your retirement savings so that you can take as tax efficient withdrawals as possible.  With the differing tax treatment of each of these buckets you can decide which lever to pull that will benefit you the most in retirement. This is all determined by what other income you have and what the current tax brackets are while you are in retirement. Although no one knows exactly what their income will be in the future we do know that the tax code is constantly changing.  Here is a look at what the tax brackets were before the TCJA. Democratic candidate Joe Biden has proposed raises to the tax brackets and these are likely to change again if the Democrats take control of the White House and Senate.

It is important to ensure you are saving in a tax efficient manner for your retirement next egg.  If you would like to schedule a call or zoom meeting to discuss how to implement a plan for your savings Click Here

Subscribe to The Financial Incline

* indicates required

Mistakes to Avoid to Ensure Early Retirement

Mistakes to Avoid to Ensure Early Retirement

Americans are living longer which is requiring more savings to maintain a comfortable standard of living in retirement.  The median retirement savings amount for people age 55 to 64 is $107,000 according to the Government Accountability Office. This amount would only equate to $310/month in income if invested in an inflation protected annuity.  Below is a list of  detriments to retiring at an early age. 

  1. Waiting to start saving for retirement –  Due to compounding you can get more, by investing less. In other words, the person that invests from age 18 until 35, can often just let the money compound without adding fresh money, and still have more money at age 65, than somebody who invests hard from 45 until 65. The younger you can invest the better
  2. Not living below your means – spending more money than you make leads to lower levels of saved money at retirement. This can also lead to excess interest payments on credit cards that eat away at your accounts.
  3. Putting money in a savings account. Putting money into a bank account that earns 0% will never allow your money to grow fast enough to retire early.
  4. Not taking risks – indirectly leads to risks coming to you. So many people are petrified by any type of volatility. Look at stocks. 100% of people should have money in stock indexes, from those that can afford it. But only about 50%-60% have that, even in developed markets.
  5. Being emotional – people panic when they see their money drop and make mistakes such as not contributing to their company 401k plan.
  6. Missing out on free money – many workers in America live paycheck to paycheck and believe that they cannot afford to contribute to their company retirement plan. The majority of companies that offer a 401k plan also have a match. That match is free money to the employee and a 100% return on their money. Missing this benefit leaves people working longer than those that save appropriately.
  7. Market timing –nobody can time markets consistently for years. Not me, you, or anybody else. If you get one prediction right, you will probably get the next one wrong. This is linked to point 7 and being emotional. Many people get out of markets after getting fearful due to the media
  8. Listening to the news – the media is there to entertain and to attract clicks and views.  Fear sells and that oftentimes gets more viewers and readers.  Unfortunately following this as advice can lead to poor investment decisions.




If you would like to schedule a call or zoom meeting to discuss what these changes could mean to your situation. Click Here

Subscribe to The Financial Incline

* indicates required

Social Security Spousal Benefits

Social Security Spousal Benefits

Spousal benefits for Social Security is a complicated issue and can lead to the potential of leaving some money on the table.  Recently I hosted a webinar with BlackRock’s Michael Graci and we went over the topic of Social Security, how it works and what it means to you and your spouse.  Here are a few key items to know about Spousal Benefits for Social Security.


  1. A spousal benefit is equal to 50% of their partner’s Primary Insurance Amount (PIA) once they themselves reach their Full Retirement Age (FRA).
  2. When a spouse collects their spousal benefit can impact the total they take home. If a spouse collects spousal benefits before FRA, their spousal benefits will be reduced (please note that collecting five years early results in a 35% lower benefit). On the other hand, your spouse is not rewarded for waiting beyond FRA. Spousal benefits do not receive delayed retirement credits, so there’s no incentive to wait to collect a spousal benefit beyond full retirement age.
  3. One spouse must file for their benefit in order for the other spouse to be eligible to collect a spousal benefit.  So if they are both the same age and  one spouse waits until 70 to file and collect, the other spouse must wait until 70 to collect the spousal benefit.
  4. Individual benefits and Spousal benefits are netted against one another.  Your spouse will get the greater of 50% of your benefit or their own benefit.

The picture above shows the example of a husband and wife. Jordan has a Full Retirement Age benefit amount of $2,200, therefore if his wife Alex waits until age 66 and claims when Jordan claims she will get half of his benefit or $1,100. 

It is also important to note that when a spouse claims their spousal benefit determines what amount of benefit they will receive. If Jordan were to claim his Social Security benefit at age 62 and Alex, his wife does the same thing she will received a reduced benefit.  

Lastly it is important to note that if one spouse waits until 70 to claim their benefit this will not increase the benefit amount for their spouse. This benefit will still be based on 50% of their amount at Full Retirement Age. If that is the case it will make sense for the spouse to claim their own benefit, if possible, at Full Retirement Age to at least start receiving some benefit.


If you would like to schedule a call or zoom meeting to discuss what how you and your spouse can optimize your Social Security benefits Click Here





Link to Disclaimer

Social Security Webinar – Securing Your Retirement


Social Security – Securing Your Retirement

As you approach retirement, it is more important than ever to understand the role that Social Security benefits can and should play in your overall retirement income plan.

Join Michael Graci, Director of Investment and Retirement Education and John Bovard, Owner & Wealth Advisor at Incline Wealth Advisors, for an overview of:

  • How do Social Security benefits work for you and your spouse
  • When and how to start receiving Social Security benefits
  • Opportunities to increase your benefits throughout retirement

Virtual Event Details

Date: Tuesday, June 23rd, 2020

Time: 12:00 PM ET

Dial In: 844-621-3956

Passcode: kzSfthPt975

Meeting ID: 160 167 5132


Michael Graci

Michael Graci

Director of Investment and Retirement Education

John Bovard, CFP®

John Bovard, CFP®

Owner & Wealth Advisor at Incline Wealth Advisors

Investing involves risk, including possible loss of principal.

This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This material is strictly for illustrative, educational, or informational purposes and is subject to change.

©2020 BlackRock Inc. All rights reserved. BLACKROCK and ISHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.

Prepared by BlackRock Investments, LLC, member FINRA.

To unsubscribe or to adjust your email preferences, please visit the Subscription Preferences page.

40 East 52nd Street
New York, NY 10022

Reasons for Roth Retirement Savings Now

Reasons for Roth Retirement Savings Now

Here is why Roth savings make sense right now

The majority of American workers now saving into a company 401(k) plan for retirement. Within their 401(k) plan most employee contributions are made with pretax dollars and all employer match and profit sharing contributions are made with pretax money.  This is a great way to lower your income tax liability in the years that you are working and making the contributions. However, blindly putting money into a 401(k) plan using pretax dollars can lead to a long term spike in your and your beneficiaries income taxes. The solution to consider now is adding Roth savings, either through a Roth IRA or Roth 401(k), into your savings strategies. This can be done either by contributing or converting your savings.  Here are some reasons to consider that now.


1. Required Minimum Distributions can propel you into a higher tax bracket

A Required Minimum Distribution(RMD) is a withdrawal that everyone over the age of 72 are required to take from their pretax retirement savings. The only exception to this is non business owners still working and saving into their company 401(k) plan. The purpose of these distributions is for the IRS to start to collect tax dollars from money that has been tax deferred up to this point.  These withdrawals will add to the amount of taxable income that retirees will have. This number gets added on top of Social Security, pension income, rental income or any part time income one may have in retirement.  From my experience many retirees do not need these withdrawals to live off of.  These withdrawals can also make your Social Security payments taxable.  Roth IRA savings are beneficial to combat these withdrawals because they do not require RMDs.  By having more of your money saved in a Roth IRA vs a pretax IRA this will reduce the amount of your annual RMD.

As you can see from the chart above, once the process of RMD’s start there is a sharp increase that one will pay in taxes on an ongoing basis.  The RMD amounts slowly increase over time as the account balance also increases.  This can lead to spending your remaining years in a higher tax bracket. Another consequence of higher income from the RMD’s is the effect it will have on Social Security payments. Up to 85% of Social Security payments will be taxable if your income is above $44,000 for a couple and $32,000 for individuals in 2020.


2. Current tax brackets will sunset in 2026

When we turn the clocks over to the year 2026 the current Tax Cuts and Jobs Act that was passed back in 2017 will sunset and the rate for individuals and couples will revert back to where they were in 2016.  This means the tax brackets for will increase for all Americans.  With the amount of stimulus money that has been give to both individuals and companies it is difficult to image a world where our taxes will be lower than where they sit today.  From a planning perspective this gives us fives years for planning and finding ways to convert or contribute into Roth.

3. Passing money on to beneficiaries 

The SECURE Act that was passed by Congress back in December 2019 had a great deal of impact on retirement savings. One of the biggest changes this act made was on passing pretax IRA accounts onto the next generation.  The act eliminated the stretch provision over the lifetime of the beneficiary.  The benefactor of an Inherited IRA now must liquid the entire account within a 10 year period.  For example if a beneficiary receives a $1,000,000 inherited IRA they now have to take out at least $100,000/year to fully liquidated the account in 10 years. Think of your beneficiaries and the stages in life when they may receive these accounts.  Many of them could be in their highest earning years and this could be a very large tax burden at that time.  The solution to this is also a Roth IRA. Even though the beneficiary will still be required the liquidate the account in 10 years, the withdrawals they will be taking will be income tax free.

The solution for many can be to start converting or contributing to Roth savings both leading up to and in retirement. The advantage of a Roth IRA is that you do not have to take the Required Minimum Distributions.  Also, qualified withdrawals from a Roth IRA are received income tax free which can allow you to stay in a lower tax bracket in retirement.



Link to Disclaimer