3 Unexpected Ways You Could Lose Your Social Security Benefits
Saving for retirement isn’t easy, and many retirees depend heavily on Social Security to make ends meet during their senior years. The average benefit amount is only around $1,500 per month, however, so it’s unlikely that your monthly checks will cover all your retirement expenses.
For that reason, it’s wise to double-check that you’re squeezing every last penny out of Social Security. Your benefit amount isn’t set in stone, and there are a few things that could reduce the size of your checks.
1. State taxes
Social Security benefits are considered income in many states, so they’re still subject to state income taxes. Depending on where you live, state taxes could take a substantial bite out of your monthly benefits, leaving you with less than you expected.
The good news is that 37 states do not tax Social Security benefits. The 13 states that do tax benefits include:
|Montana||Nebraska||New Mexico||North Dakota||Rhode Island|
If you live in one of these states, it could be worthwhile to consider moving somewhere that doesn’t tax Social Security in order to keep more of your monthly checks. That said, be sure you do your research before you move. Relocating to a Social Security-friendly state could result in larger checks, but make sure that you’ve accounted for all other costs you could face.
2. Federal taxes
If you already live in a state that doesn’t tax Social Security, you’re not quite off the hook yet. Depending on your retirement income, your benefits could still be subject to federal taxes.
The IRS uses a metric called your “combined income” to determine how much of your benefits will be taxed at the federal level. Your combined income is half of your annual benefit amount plus other sources of retirement income.
For example, if you’re receiving $20,000 per year in Social Security benefits and are also withdrawing $30,000 per year from your 401(k), your combined income is $10,000 plus $30,000, or $40,000 per year.
|Percentage of Your Benefits Subject to Taxes||Combined Income for Individuals||Combined Income for Married Couples Filing Taxes Jointly|
|0%||Less than $25,000 per year||Less than $32,000 per year|
|Up to 50%||$25,000 to $34,000 per year||$32,000 to $44,000 per year|
|Up to 85%||More than $34,000 per year||More than $44,000 per year|
The only way to avoid paying federal taxes on your benefits is if your combined income falls below $25,000 per year (or $32,000 per year for married couples).
One caveat, though, is that Roth IRA withdrawals do not count toward your combined income. If the majority of your savings are in a Roth IRA, that can reduce your combined income and the amount you’ll pay in federal taxes.
3. Waiting too long to claim
You can begin claiming benefits as early as age 62, but the longer you wait to claim, the more you’ll receive each month. However, it is possible to wait too long to file for benefits, and that could cost you.
Past age 70, there is no longer any financial incentive to continue delaying benefits. In other words, while you can wait until after age 70 to file, it won’t result in larger checks each month. You’ll receive the same amount each month whether you claim at age 70 or any age thereafter.
For that reason, you’re better off claiming at age 70 even if you plan to continue working past that age. Otherwise, you could miss out on thousands of dollars in benefits by waiting too long to claim.
Social Security benefits can make up a significant portion of your income in retirement, so it’s wise to make sure you’re receiving as much as possible. Every dollar counts, and by maximizing your benefits, you’ll be on track to enjoy a more comfortable retirement.
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