Investing in This Account Today Could Help You Boost Social Security Benefits in Retirement

Key Points

• Social Security benefits are subject to tax.

• The threshold at which tax kicks in isn't indexed to inflation, so more people are taxed each year.

• You can reduce the chances you'll owe tax on benefits if you keep your retirement money in Roth accounts.

• The $23,760 Social Security bonus most retirees completely overlook ›

Social Security benefits are taxed at the federal level. They are also taxed in a small number of states.

This can be upsetting to discover as a retiree, since these are earned benefits that you became eligible for due to taxes you paid throughout your career.

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The good news is, you don't just have to resign yourself to being taxed on your retirement income.

There are things that you can do during the retirement planning process to reduce the likelihood that the IRS is going to get a future cut of your Social Security checks.

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Here are the rules for taxes on Social Security benefits

The first thing that you need to know about taxes on Social Security is that there is a certain income threshold at which your benefits become partly taxable.

If you are a single tax filer and your provisional income is $25,000 or higher, you will be taxed on part of your benefits. If you are a married joint filer, the threshold is $32,000 when your benefits start to become taxable by the IRS.

Not all of your income counts in determining provisional income. It's calculated by adding half your Social Security benefits, all taxable income, and some non-taxable income together.

Unfortunately, the thresholds when benefits become taxable are not indexed to inflation.

As a result, a growing number of people end up getting taxed on Social Security each year. This needs to be a consideration when making your retirement plans, as the more you pay in taxes, the less money you'll have to cover your other costs.

Investing in this account could help you avoid tax on Social Security

The good news is, you do have an option to try to reduce the chances you'll be taxed on your retirement benefits. If you do not want to give the IRS a cut of your hard-earned Social Security benefits, you can make strategic choices about your retirement investing.

Specifically, you should seriously consider investing in a Roth IRA or a Roth 401(k). These Roth accounts work differently from traditional retirement accounts because you cannot claim a tax break when you invest in them. Instead, your tax breaks come later.

With Roth accounts, you can make tax-free withdrawals as a senior, provided you follow the rules for the accounts. Because the distributions are tax-free, the distributions from your Roth accounts are not counted in the provisional income that is used to determine if the IRS can tax your Social Security.

Of course, since the withdrawals from your Roth plans are not taxed, you won't have to worry about giving the IRS a cut of your distributions either. So, you can have a substantial amount of money coming in and not worry about giving part of it to the government.

Now, if you have other taxable income sources, it's still possible your Social Security will go above the threshold where taxes kick in. But if you focus on Roth investing and you make a strategic plan for your retirement that limits your taxable income, this should not end up being a concern for you when you reach your later years.

You'll need to think carefully about whether you'd prefer the up-front tax break that traditional accounts offer, which does make it easier to invest today, or whether you'd rather reap these significant tax benefits later as a retiree when you'll be counting on your Social Security and distributions to cover your costs.

The $23,760 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.

One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.

View the "Social Security secrets" »

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