Taxation of Social Security

Welcome to another segment of Coffee Talk, Jon Torbet, Art Canfield. Just the exciting, thrilling topic of Social Security is what we’re going to be diving into next. I mean that seems to be something as we have conversations with people just like you coming into the office here in Traverse City, to talk about when should I draw Social Security? How long is it going to last, is one of the questions. But one of the topics that we’ll dive into here in a little bit is what about taxation on Social Security? I know it’s one that, seems like a lot of people don’t really think about that too much. Absolutely, I think it’s a piece that’s far overlooked. You know Social Security has been in the News. Honestly, with new Administration talks about it. It’s been talked about for a long time. There’s fear tactics out there of running out. There’s all these sort of things going on and it’s a huge source of income for most people in retirement. They paid in for many years, so they want to get some return back. And much of the focus is about maximizing or how do I get more or when do I draw? All this sort of stuff that you’re exactly right, Jon. Like maybe the biggest money saving or money keeping, in a way, move is that taxation piece of it. Yeah, I mean ultimately, I’m sure just like you, you want to keep as much money in your pocket versus paying Uncle Sam. And so there’s a very long complicated equation that goes into this. That we’ll leave that up to the Accountants and professionals that dive into that. But you have to consider what those other taxable income sources are. So if you, as an example, have a Pension that you’re receiving income along with Social Security. You have to factor that in. What about if all of your retirement accounts are 401K or IRA and haven’t been taxed yet? That’s going to be part of this calculation. What if you have a part-time job and you have a little bit of earned income wages, etc.? Again, that’s going to be factored in to this equation where the more income you have in those sources, more of your Social Security is going to end up taxable. Absolutely, you know if you are working through an income plan, retirement income plan or haven’t started yet and your Advisor or you haven’t considered all of those things that Jon just talked about of when to take Social Security. You’ve missed the boat. You flat have not done proper planning because when you look at when you should take Social Security, it has to factor in all those things. Otherwise, you are likely making the wrong decision of it mainly just boiling down to emotions of when to take it. Let me give you an example of kind of something that a person didn’t see coming that kind of came to bite them with taxation on Social Security. Here basically in our Gaylord office we were sitting down with a couple. They had been long time clients with Centennial Wealth here. Great relationships and they hadn’t needed their money. They had their Social Security. They had very modest expenses. So they had been living off from that. They had a savings account, those sort of things. And they came to us and said, we want to help our children with a down payment on a house. So basically, they were looking to gift some money. Now the only money that they had access to that was of the size they were looking for was out of their IRA. So untaxed to this point and they were going to have to pay tax on that. Well for several years because they weren’t of required minimum distribution age yet, they were enjoying basically no taxes on their Social Security, right? You know with their income levels, we had done small Roth conversions along the way to kind of maximize that sweet spot. And then this gift, they were looking to get was going to make it so their Social Security was all of a sudden taxable. So when we ran the numbers and talked about the cost of this, you know we wanted to point out of what that was. Now they chose to still gift the money to their children because that was their wish. But it ended up costing them significantly more in taxes than they originally thought because now their Social Security was taxable, when originally it wasn’t. Yeah and so a lot of people find themselves in that positon where they haven’t really thought about hey, what am I going to do if this situation occurs? And that’s really generous of them to be gifting funds and everything. But that’s where at Centennial Wealth Advisory, we have a tax team that ultimately looks at things as Art referenced to look at how to best utilize these taxable assets over time and potentially transition them over to tax-free assets. And so again, it’s one where that needs to be an annualized plan that you should be looking at year in and year out. And so often we hear from folks that come into our office for the first time where well, my Advisor told me to go talk to an Accountant about that. And note, you know it’s one where there isn’t necessarily that team aspect where the Accountant and Advisor are working together in tandem to try and produce the best outcome for you. So if you find yourself in a position where you don’t have that team and you want to make sure that you’re keeping as much money in your pocket versus Uncle Sam. We welcome you to give us a call here at Centennial Wealth Advisory where we are hoping to help you plan to retire well.