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Protecting Social Security Benefits from Taxation

Social Security was Tax Free, Now it’s Taxable & May Be Means Tested in the Future

Mesa 12/13/2019 9:00:00 AM

Social Security is America’s retirement system for most retirees. Advisers recommend that Social Security should comprise 40% of your retirement income. That’s just economic ideology that isn’t rooted in reality. For most of the middle class, Social Security benefits represent over half of their retirement income. That wouldn’t be so bad if Social Security benefits weren’t subject to ordinary income tax. To many American retirees, taxing Social Security is a broken promise. As recent as three years ago, many politicians promised not to alter Social Security benefits for the Baby Boomers. But in the stealth of night the Congress, shut down the “file and suspend” option for most Boomers and transferred the monies to support the near bankrupted Social Security disability fund. Many Boomers lost between $20,000 and $30,000 dollars due them. Social Security benefits generally paid a cost of living increase, but over the last seven years, the increase was either slight or none at all, i.e. not keeping pace with the real cost of living. 

To protect Social Security benefits from being taxed, you have to defend two access points: one is Social Security income itself and other investments that are includable in the provisional income test for benefit taxation.  The four tax-free funding vehicles that are not includable are: health savings accounts, Roth IRAs, Cash Value Non-Modified Endowment Contracts (TAMRA compliant life insurance) and Home Equity Conversion Mortgages. Under current law, these four could be designed to construct a tax-free retirement plan. And to counter Social Security benefit income, you need to use your tax deductions, exemptions and tax credits judiciously to offset the income.

Tax management is absolutely required in retirement to keep more money in your pocket, to spend as you see fit. But you need to include tax management at the beginning of the retirement savings process by selecting tax advantaged products and converting any qualified monies to Roth IRAs, if it makes sense in your situation.

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