These tax basics, coupled with timing flexibility for both Social Security and IRAs, make certain strategies promising. The one proposed by Mahaney at Prudential starts with people in their 60s delaying Social Security benefits for as long as possible. You may start tapping into Social Security as early as age 62, but your monthly benefits will be larger if you hold off, preferably until age 70, when benefits are maximized.
Assuming you delay but need money in the meantime, you can supplement your income by starting IRA withdrawals earlier than you might have planned. The conventional wisdom of delaying IRA and related withdrawals isn’t the best choice for a lot of people, Mahaney argues. Some investors who delay will wind up creating a “greater deferred tax liability,” he said.
USA TODAY
How to create tax-efficient income in retirement
Hello there, Mr. Roth
A related strategy is to take advantage of Roth IRAs. The discussion above describes withdrawals from traditional deductible IRAs. Money taken from these accounts is taxed as ordinary income, and distributions must begin after age 701/2. With Roth IRAs, neither aspect applies — withdrawals generally aren’t taxable, and there’s no requirement to begin at 701/2. That means Roth withdrawals won’t push your income into a range where Social Security benefits might get taxed.Many investors like Roths because the money comes out untaxed and because there are no required minimum distributions, as with regular IRAs. “They’re even more valuable if you factor in Social Security taxation,” Mahaney said.
Prudential’s take
A report from Prudential Financial discusses the tax ramification of Social Security benefits and various strategies to get the most out of the program and avoid mistakes.
One mistake highlighted in the report is rushing to collect benefits at an early age, only to regret the reduced payouts for the rest of your life.
A second is failing to understand the various ways married couples can integrate their benefits. A worker might be able to collect any of three types of Social Security benefits — on his or her own record, on a spouse’s work record and as a survivor, upon the death of a spouse. Social Security rules involving the benefits available to married couples are confusing and often nonintuitive. But they’re important, Mahaney noted, especially for widows who risk outliving their money late in life.