The rules governing Social Security benefits are incredibly complicated, with countless exceptions and qualifications.
So it’s no surprise that many workers and retirees end up leaving some money on the table because they aren’t aware of all the ways they can increase their retirement benefits. If you haven’t already done so, consider boning up on the below concepts to see if you can find ways to improve your own benefits.
1. You can potentially minimize taxes on your Social Security benefits
Depending on your income in retirement, up to 85% of your Social Security benefit may be subject to income taxes, which can eat up a significant portion of said benefits. By setting up your retirement income sources to minimize or avoid these taxes, you may be able to hang on to your entire benefit checks instead of handing over part of them to the IRS.
Your Social Security benefits will be partially taxable if your “combined income” exceeds a certain threshold. Your combined income is the sum of your adjusted gross income (your taxable income from wages, dividends, and interest minus certain adjustments), any nontaxable interest you receive, and one-half your annual Social Security benefit. If you’re a single tax filer, a combined income of $25,0001 or more will expose your retirement benefits to taxes. For married couples filing jointly, the threshold is $32,000.
Thus the key to minimizing Social Security benefits taxes is to get as much income as possible from nontaxable sources, which won’t factor into your combined income. For example, saving for retirement through a Roth account during your working years (in addition to your traditional IRA or 401(k)) gives you a source of nontaxable income once you retire. That can be enough by itself to keep your taxable income below the amount that would trigger Social Security taxes.
2. Divorced retirees may be eligible for spousal benefits
If your spouse receives a significantly higher Social Security benefit than you do, you can claim spousal benefits and lock in a higher benefit amount for yourself. However, what many retirees don’t realize is that if you’re divorced, you may still be entitled to claim spousal benefits based on your former spouse’s record.
You qualify to claim spousal benefits if your marriage lasted 10 years or longer, you’re currently unmarried, and you’re 62 or older. A spousal benefit can be as much as one-half as your spouse’s (or former spouse’s) full retirement benefit. Spousal benefits replace, rather than supplement, your own Social Security benefits, so they’re only worth getting if your spouse’s Social Security benefit is more than twice your own.
3. Your birthdate determines when you’re eligible for full retirement benefits
The Social Security Administration has invented what it calls “full retirement age” — the age at which you’re eligible to receive 100% of your promised Social Security benefit. Claim your benefits before full retirement age, and you’ll be hit with a penalty that will permanently reduce said benefits; wait beyond full retirement age to file for Social Security, and delayed-retirement credits will permanently increase your benefits checks.
The confusing thing about this system is that there is no single full retirement age. Instead, your Social Security full retirement age is based on your birth date. Here’s how it plays out:
4. You can have one Social Security “do-over”
So if you were born in 1960 and claimed your Social Security benefits at age 65 because you thought that was your full retirement age, you’d suffer a penalty to your benefits of about 13.3%. In other words, if your full monthly Social Security benefits check was $1,500, then claiming your benefits at age 65 in this example would reduce your monthly benefits check to about $1,300.50. That’s why understanding your full retirement age and how it affects your benefit checks is a crucial part of maximizing your Social Security benefits.
If you claimed your benefits and then later realized that you had done so too early, you might be able to withdraw your application and wait a while before reclaiming them. Naturally, there are some limitations to the Social Security do-over:
- You can only do it within 12 months of initially claiming your benefits.
- You have to repay all the benefits you’ve received so far.
- You can only withdraw your application once in your lifetime.
To withdraw your Social Security benefits claim, fill out Form SSA-521 and send it to the address on the form. When you withdraw your Social Security benefits claim, you’ll also need to decide whether you want to withdraw your Medicare claim at the same time.
Social Security benefits can provide a substantial amount of retirement income, and there’s no reason to settle for less than the most you can possibly get. After all, you paid Social Security taxes while you were working and put your hard-earned money into the program; you might as well make the most of the program when you’re ready to leave the working world and enjoy your golden years.
Source: The Motley Fool, January 2018
This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.
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