For some Social Security taxes can really pile up

For some Social Security taxes can really pile upTo minimize taxes, it pays to plan withdrawals from Social Security and retirement plans.(Photo: Thinkstock)Now that income-tax season has come and gone, plenty of seniors probably could benefit from a refresher course in Social Security tax basics. So could people in their 50s and early 60s who will start collecting retirement benefits in the not-too-distant future.Yes, it’s true that Social Security retirement benefits often are entirely tax free and that millions of seniors don’t need to file income-tax returns. But for many others, taxes definitely apply on Social Security income.This shouldn’t come as a surprise considering how prosperous many older Americans are. As a group, today’s seniors are more likely to own homes and less likely to be impoverished than younger Americans.Many people continue to work well into traditional retirement age, and millions of seniors have significant investment earnings and pension benefits to collect. Any of these factors can trigger tax obligations.Here are three key issues:1. Benefits may be taxed If Social Security is your only source of income, you probably don’t face income taxes and probably don’t need to file a return. But if you also collect income from other sources, taxes could apply on a portion of your benefits, possibly up to 50% or even up to 85% of benefits. The IRS features an interactive tax-calculator tool at irs.gov that can help you find out if benefits are taxable — and what proportion.Another way to determine this quickly is to take half your Social Security benefits and add this to your other income, including tax-exempt interest from investments such as municipal bonds. If the total exceeds $25,000 and you are single or head of household, some Social Security benefits likely are taxable. If the total exceeds $32,000 and you are married filing a joint return, some benefits might be taxable.USA TODAYQ&A: How to maximize Social Security benefits2. Withdrawals can trigger taxesExcept for Roth Individual Retirement Accounts and contributions made to non-deductible IRAs, money pulled from retirement accounts generally is taxable at ordinary income rates. This can cause the unintended consequence of making Social Security benefits partly taxable.Stan Bormann, a 74-year-old retiree in Surprise, Ariz., notes that it’s fairly easy for seniors to find themselves in the 28% federal tax bracket (or higher) when taking out substantial sums in the form of required minimum distributions or RMDs from retirement accounts.”This is nothing to complain about,” he said. “What I think is something to complain about is that often this triggers tax on up to 85% of our Social Security.”Most people who invest diligently in retirement accounts at a young age probably don’t think much about this — they’re too busy building up their nest eggs. Investors in traditional IRAs probably do recognize that their withdrawals will come out as ordinary income rather than at lower capital-gains rates. But what they might overlook is the additional tax consequence exerted by retirement withdrawals on Social Security benefits.”I think the RMDs should not be considered in the calculation triggering taxes on Social Security,” Bormann said.In short, if you take an IRA withdrawal such as a required distribution, that money could push you into the situation where some or most of your Social Security benefits become taxable. This is another reason to plan your withdrawals. In particular, it could justify delaying the receipt of benefits while in your 60s and, instead, withdrawing more heavily from retirement accounts during those years.3. Other penalties People owning 401(k)-style plans, traditional Individual Retirement Accounts and other retirement plans typically need to start pulling out money after reaching age 70 1/2. Failure to do so triggers a stiff penalty or tax equal to 50% of the required minimum distribution that was supposed to be taken but wasn’t.The RMD is based on life expectancy and changes annually, so that each subsequent distribution eats up a slightly larger slice of the remaining funds. “You cannot keep retirement funds in your account indefinitely,” the IRS warns, and the RMD rule is designed to ensure that investors comply.USA TODAY’s Nanci Hellmich talks about how to save aggressively for retirement in your 20s, 30s, 40s and beyond. (Your Best Life in Retirement, MONEY)Don't let the government keep the Social Security benefits you rightfully deserve, said Laurence Kotlikoff, co-author of 'Get What's Yours.' NewslookUSA TODAY’s retirement columnist Rodney Brooks talks to Jeanne Thompson, a vice president at Fidelity about saving aggressively for retirement. (MONEY, USA TODAY)USA TODAY’s retirement columnist Rodney Brooks talks to Jeanne Thompson, a vice president at Fidelity Investments about what it takes to save a million dollars for retirement. (MONEY, USA TODAY)Target date fund managers are continually working to improve returns even as their fundholders 'set it and forget it,' said Fredrik Axsater, Global Head of Retirement Programs for State Street Global Advisors. NewslookPresident Barack Obama calls for tighter rules on retirement account brokers, reigniting a confrontation with the financial services industry over rules affecting trillions of dollars in 401k and other savings accounts.. (Feb. 23) APUSA TODAY’s Nanci Hellmich shares best tips for landing a job in your retirement years. (MONEY, USA TODAY)USA TODAY’s Nanci Hellmich outlines a plan for pumping up your physical activity in the new year. (MONEY, USA TODAY)Retirement planning is a challenge regardless of your pre-retirement income. Over half of American households may not be able to maintain their standard of living in retirement, according to the Center for Retirement Research. NewslookIf anyone should know how to get the best income from your funds, it’s Gary Davis, head of Vanguard’s $900 billion in bond funds. And that’s why we talked to him. (MONEY, USA TODAY)Katherine Dean, Senior VP/Managing Director of Wells Fargo shares tips on retirement planning. If you're starting to think about your New Year's resolutions, investing efficiently in your financial future is always a good one to consider. It's never a waste of your time to understand where your money is going and how you can save for your ret NewslookUSA TODAY’s Nanci Hellmich talks about how much exercise it takes to burn off some holiday indulgences. (Your Best Life in Retirement, MONEY)USA TODAY’s Nanci Hellmich talks about how to avoid the pitfalls of impulse purchases. (Your Best Life in Retirement, MONEY)USA TODAY’s Nanci Hellmich outlines stress-reduction strategies for the holidays (USA MONEY, USA TODAY)USA TODAY’s Nanci Hellmich shares ideas for creative inexpensive holiday gifts. (USA MONEY, USA TODAY)Same-sex couples in general are likely to have saved far less for retirement than their straight counterparts, according to exclusive analysis of the Federal Reserve's Survey of Consumer Finances by AP. (Nov. 21) APUSA TODAY’s Nanci Hellmich offers easy ways to curb your spending during the holidays. (Your Best Life in Retirement, MONEY)USA TODAY's Nanci Hellmich offers ideas for cutting costs when dining out. (USA MONEY, USA TODAY)USA TODAY's Nanci Hellmich shares advice from financial experts who say many Americans need to save much more aggressively for retirement. USA TODAY's Nanci Hellmich explains how to cope with retiring from your job. (Money, Retirement, USA TODAY)USA TODAY’s Nanci Hellmich shares tips for decluttering in retirement. (Retirement, USA TODAY)Pets ease transition into retirement USA Today's John Waggoner explains how a Social Security raise will impact retirees in 2015. USA TODAY contributor Regina Lewis explains why a 20 minute financial planning session benefits you. (Money Quick Tips, USA TODAY)Millennials may be struggling with student loans and a rough job market, but nearly half have already started saving for retirement, said Kristen Robinson, Senior Vice President at Fidelity. NewslookThe new CEO Of AARP CEO Jo Ann Jenkins who takes over on September 1, 2014 replacing outgoing CEO A. Barry Rand. Nearly half of Americans surveyed by the Wells Fargo/Gallup Investor and Retirement Optimism Index said they are worried about outliving their savings. NewslookAmreicas Markets with John Waggoner on the Social Security cost of living raise. USA TODAYAmericans are feeling guilty about not investing enough over the past year, said Aron Levine, head of Preferred Banking and Merrill Edge at Bank of America. NewslookConsumers should own an annuity for what it will do, not what it might do, says Stan Haithcock, annuity expert and author of "The Annuity Stanifesto". NewslookPeople need to plan to provide income for themselves in retirement with the same care and diligence in which they save for retirement, says Scott Holsopple, Managing Director of Retirement Solutions at The Mutual Fund Store. NewslookRetirees and investors close to retirement should not make dramatic changes in their accounts due to the recent market volatility, said Scott Thoma, Retirement Strategist for Edward Jones. Newslook

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