Been told by everyone under the sun that when it comes to retirement you should, if you can, maximize Social Security benefits?
Well, the reality is that you probably shouldn’t, and the reasons are based on 2 things specifically, which are:
- The federal regulations regarding Social Security benefits.
- How you saved for your retirement, which ties back to reason #1.
The federal regulations regarding Social Security benefits
- Your Social Security benefit can be taxed.
- If your “income” while receiving Social Security benefits, as an individual, is between $25,000 and $34,000 up to 50% of your Social Security benefit can be taxed.
- If your “income” while receiving Social Security benefits, as an individual is over $34,000 up to 85% of your Social Security benefit can be taxed.
- Income to determine how much of your Social Security benefit will be taxed is:
- Adjusted gross income plus Tax-Exempt Interest plus ½ Social Security benefit.
By maximizing Social Security benefits, you are, in fact, inching yourself closer and closer to the real possibility of that benefit being taxed.
This is not very good for your income or health in retirement…believe it or not.
Why maximizing Social Security benefits is bad for your health:
- To receive any Social Security benefit, you must accept Medicare Part A when eligible
- Eligibility starts at age 65 and when you no longer have creditable health insurance.
- Medicare has other Parts, B and D, that you must enroll or face late penalties.
- Medicare Part B and Part D premiums are based on your income through IRMAA
- Medicare’s Income Related Monthly Adjustment Amount uses your income to determine your Part B and D premiums
- The more income you generate in retirement that is visible to the IRS the higher your Medicare premiums will be.
- Income for IRMAA is defined as:
- Adjusted Gross Income plus Tax-Exempt Interest plus Taxable Social Security benefits
- Your Medicare premiums and any surcharges due to IRMAA are automatically deducted from your Social Security benefit.
- The higher your Medicare costs, the lower your Social Security benefit.
How you saved for retirement will impact your Social Security benefit
Due to the federal laws concerning Social Security and Medicare those with assets in a Traditional 401(k), IRA or 403(b), if they so choose to maximize their Social Security benefit, will in reality actually be increasing their overall taxes, increasing their Medicare premiums and reducing their Social Security benefits.
If you have saved any money in a Traditional 401(k), IRA or 403(b) or if you have ANY tax deferred savings at all you should never, ever, even think to maximize your Social Security benefit.
The reason why you don’t want to maximize your Social Security benefit if you have a Traditional 401(k) or IRA
From the federal regulations provided above you, now, know that:
- Social Security benefits are taxed based on income
- In order to receive Social Security benefits you must enroll into Medicare
- Medicare premiums are based on income
- You pay for your Medicare premiums through your Social Security benefit
With a Traditional 401(k), IRA or 403(b) at age 72 you will have to make a required minimum distribution (RMD) from your savings.
This RMD will be part of your AGI and it will be added to ½ of your Social Security benefit, which will vault your overall income over that $34,000 limit.
85% of your Social Security benefit will be taxed which will be added to your RMD which may vault you into an IRMAA Threshold which will increase your Medicare premiums.
As your Medicare premiums increase, they, along with any taxes you must pay on your Social Security benefit, will reduce your Social Security benefit.
Because of people’s willingness to receive a tax break today, while also trying to maximize Social Security benefits, they will in turn raise their taxes, increase their Medicare premiums and reduce their Social Security benefit.
And yes, this all federal law.
Now, for those who opt to invest with a Roth 401(k), IRA or 403(b) instead of investing with a Traditional 401(k) or IRA maximizing Social Security benefits becomes a much simpler decision as Roth accounts do NOT count towards AGI
With a Roth account taxes are paid today, while you are working and hopefully when you can afford them. Due to taxes being paid today there are no RMD’s later and when or if you do take any money out of that Roth it does not count as income towards taxation or even IRMAA.
Roth withdrawals do NOT count towards AGI.
So, if you want to maximize Social Security benefits make sure your retirement savings are in a Roth 401(k)/IRA/403(b) or just simply own life insurance and forget about IRMAA all together.
If you are saving for retirement in a Traditional 401(k) or IRA maximizing Social Security benefits is not the wisest decision as your Social Security benefit will be taxed which will lead to higher Medicare premiums, and much lower Social Security benefits.
Before making any decision on income in retirement, because of federal regulations, it is highly recommended you speak with a Certified IRMAA Specialist to plan for your future