How Social Security Benefits are Taxed - YouTube

How and when are Social Security benefits  

in retirement taxed? That is  the subject of this video.

Welcome to another episode of the Financial Fast  Lane my name is Lane Martinsen and if you're new  

to this channel, I am the author of the Holistic  Retirement Planning Revolution and on this channel  

we discuss many of the topics in the book and  many more, specifically for people who are age  

50 and over. Today we're talking about taxes  on your Social Security benefits in retirement  

so not to be confused with the payroll tax or the  FICA tax while you're working, and paying into  

this system. That is not what we're talking  about. What we're talking about here today  

are when you're in retirement receiving  your social security benefits will those  

benefits be taxed and how will they be  taxed so the answer is it depends on  

your other sources of income or assets  so if you take a look at my screen here  

this is the provisional income formula  so provisional income is an irs term  

and what they're going to do is they're going  to take any taxable income that you have  

we refer to it as the taxable bucket and  i'll break that down for you they're also  

going to take anything that you have  coming out of your retirement accounts  

we call that the tax deferred bucket and then  they're going to take 50 percent of your annual  

social security benefit they add that all together  and that number is your provisional income number  

and that is what determines if and or how much  of your social security benefits will be taxed  

so let me just break this  down a little bit for you  

the taxable bucket it's going to include it could  be any type of investments that you might have  

any you know if you've got capital gains  taxes that are due whether we're talking  

short-term or long-term it's any realized  gains um any earned income that you might  

have so if you still have part-time job or any  sources of income if you have a rental income  

anything that's taxable is going to be coming out  of this taxable bucket right now the tax deferred  

bucket these are going to be your retirement  accounts so any you know if you have a 401k an ira  

maybe you have a 403 b 457 or a tsp  a thrift savings plan while there are  

many different types of qualified retirement  accounts they all have one thing in common  

or a couple things in common that is when you  contributed into them you did not pay tax on that  

money instead you got a tax deduction right and so  those contributions have been growing tax deferred  

and so now when you get to retirement and you  start to take distributions out you will be taxed  

as ordinary income and what is the tax rate going  to be on that money and the answer is you don't  

know well we know what it is this year right but  we don't know what it'll be in the future because  

it's subject to change and if tax rates are higher  in the future that means whatever you have in your  

tax deferred retirement accounts may not be what  you actually get to spend in retirement right  

so it's a variable you will have rmds on  this account required minimum distributions  

once you reach age 72. and so whether you want  to take money out or not you will be required to  

so that they can collect tax on that money in  our provisional income formula they're going  

to be taking any taxable earnings that you've got  from the taxable bucket any distributions coming  

out of your tax deferred retirement accounts and  then they take your annual social security benefit  

50 of that and add that together  and that is the provisional income  

number and so if you're single and your  provisional income number is exceeds 25 000  

then that means that 50 of your social security  benefits will be taxed as ordinary income  

at whatever the income tax brackets are at  that time in the years in which you take  

distributions if it exceeds 34 000 then 85 percent  of your social security benefits will be taxed  

as ordinary income so what that means is that  15 percent of your social security benefits  

will never be subject to tax but most of it  will be if you have done a good job or even  

an average job of saving in in your retirement  accounts the thresholds for a married couple  

are 32 000 and 44 000 respectively now i  have the opportunity over many years to  

with my clients in planning out their retirement  income and different strategies that we  

put into place and if you've done even an  average job of saving in 401k plan or in iras  

most people are going to find themselves easily  in the position where 85 of their social security  

benefits will be taxed and so this is what i refer  to as the stealth tax because a lot of people  

don't see this one coming and so you you might  be looking at your social security benefits and  

and you you know this dollar amount  that you're expecting or anticipating  

and only to find out that it's effectively reduced  through taxation and it can be a significant chunk  

right 5 000 6 000 7 000 or more per year lost to  taxes if tax rates go up in the future could be  

much more than that now it is possible for most  people to implement some strategies where they  

reposition their assets such that they're able to  either completely avoid the social security tax or  

reduce their social security taxation  significantly but you've got to implement some  

strategies and there is a window of time where you  can get that done at some point we think in the  

in the not too distant future that  window of opportunity will be closing  

but let me show you the end result  the end result is um by by simply  

implementing some strategies where your social  security benefits avoid taxation it will add  

about seven years to a retirement portfolio  making your overall retirement income last  

seven years longer now everyone's situation  is going to be unique and vary but how do we  

do that and we do it with some strategies and we  have to have the third bucket so there is a third  

bucket i like to call it the tax-free bucket and  so how do we get money into our tax-free bucket  

it is we're talking about roth iras roth  401ks roth conversions and some life insurance  

strategies and that's it that's the only way to  get your money into a truly tax-free environment  

and so when the money is in this tax-free bucket  regardless of what type of investments that you  

may have all of the gains are tax-free forever  there are no required minimum distributions and  

getting the right amount in each of these buckets  is what will make a big difference so this is a  

very important concept there is a mathematically  ideal balance to have in each of these buckets  

there are reasons why we want a certain  amount of money in the taxable bucket  

there's a reasons why we want a certain  amount of money in the tax deferred bucket  

but it's going to vary depending on your situation  so we have a standard deduction and so there's a  

certain amount of money that we can get out  of our tax deferred buckets or out of our  

taxable buckets tax-free because it's offset by  standard deductions but if we have too much then  

it's going to kind of bump you up into a scenario  where you're you're locked in and you're not going  

to be able to avoid the taxation on social  security and so we do this with strategies  

and relocating assets we're talking about  roth conversions a very important part of that  

it could be other strategies that are implemented  through the taxable bucket also that can include  

real estate there's some strategies there's  a number of unique ways to to accomplish this  

but if you have the right amount you want  ultimately most of your money in the tax-free  

bucket if possible now everyone's not going  to be able to to to make you know depending  

on your situation you're not going to be able  to to get all of it shifted into tax-free free

but you can at least get a significant  portion but you've got to do when you do  

roth conversions they've got to be done wisely  and you've got to use tax bracket management and  

so we want to take advantage of the lower tax  brackets because if you convert too too much  

too fast it'll bump you up into the higher tax  brackets and you end up paying more tax which is  

defeats the whole purpose so it's got to be  done carefully when it comes to retirement  

distribution planning and planning for your income  in retirement there is there are many different  

issues that you face that you never had to deal  with prior to retirement you have sequence risk a  

whole new risk that comes into play um and i have  other videos that address that and explain that  

but social security claiming strategies and  social security taxation withdrawal rates

investment risk inflation all the different  types of investment tools out there  

there's a lot to consider and a  good plan is going to reduce risk  

without sacrificing gains and returns and  growth keeping up with or surpassing inflation  

and losing money unnecessarily to taxes is  something most people don't want to do and so

i have a website here where you can get a  professional social security analysis if you  

would like you just go to socialsecuritylane.com  more information on that for a nominal fee we  

create a professional social security analysis  report for you i hope that you enjoyed this  

and found this beneficial i look  forward to seeing you in the next video