Social Security benefits are a key source of retirement income, but they may be subject to federal income tax depending on your overall income. The amount taxed can vary, but there are strategies available to minimize taxes on your benefits. By carefully managing your income and withdrawals, you can reduce the taxable portion of your Social Security benefits.
The IRS taxes Social Security benefits if your combined income exceeds certain thresholds. Your combined income is the sum of:
If your combined income exceeds these limits, up to 85% of your Social Security benefits may become taxable. Fortunately, there are strategies to reduce the amount of benefits subject to taxation.
One effective strategy is to take Roth IRA withdrawals. Since Roth IRAs are funded with after-tax dollars, qualified withdrawals are tax-free. By taking withdrawals from a Roth IRA, you avoid adding to your taxable income, which helps keep your combined income low. This can prevent more of your Social Security benefits from becoming taxable, especially if you’re already close to the income threshold.
If you are 70½ or older, you can make Qualified Charitable Distributions (QCDs) from your traditional IRA. A QCD allows you to donate up to $100,000 per year directly to a qualified charity without the withdrawal counting as taxable income. Since QCDs don’t increase your taxable income, they can help lower your combined income, reducing the amount of Social Security benefits that are taxed.
Managing other income sources in retirement—like pensions, annuities, or 401(k) withdrawals—can also help minimize taxes on your Social Security benefits. By keeping your income below the thresholds for Social Security taxability, you can reduce the portion of your benefits that will be taxed.
Delaying Social Security benefits until your full retirement age or even age 70 can help you reduce the taxable portion of your benefits. Waiting to claim benefits will also increase your monthly payments, providing long-term financial benefits.
