Understanding the Tax Surprise in Retirement
As you approach retirement, one of the biggest surprises many Americans face is the unexpected tax bill on their Social Security benefits. In fact, nearly half of all retirees pay taxes on these benefits—money they worked their entire lives to earn. At Dan White and Associates, we believe you deserve to keep more of what you’ve worked so hard for. This guide will walk you through how Social Security is taxed, what causes those taxes to spike, and the steps you can take to minimize them.
How Social Security is Taxed
Let’s begin by understanding how Social Security benefits are taxed. The key term here is “provisional income,” which includes your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits. If you’re single and your provisional income exceeds $25,000—or married and it exceeds $32,000—you may be taxed on up to 85% of your Social Security benefits. That’s right: up to 85%.
This calculation can create what’s known as the “tax torpedo,” where each additional dollar of income results in a disproportionately high tax rate on your benefits. It’s a hidden penalty that catches many retirees off guard.
A Real-World Example:
Jim and Linda
Consider a couple, Jim and Linda, both 66 years old. Jim receives $38,000 per year in Social Security, and they withdraw $30,000 from their IRA annually. Because of the way provisional income is calculated, a significant portion of Jim’s Social Security is taxed—leaving the couple with less net income than expected. The combination of IRA withdrawals and Social Security created an income spike that pushed their benefits into the taxable range.
Without proper planning, this can become a costly and frustrating surprise—especially for retirees on a fixed income.
Strategy #1:
Roth IRA Conversions
One strategy is a Roth conversion. By converting funds from a traditional IRA into a Roth IRA, retirees can reduce the size of future required minimum distributions (RMDs), which count toward provisional income. This helps lower the amount of Social Security subject to tax.
Jim and Linda, for example, could begin modest annual Roth conversions in their early 60s—locking in today’s historically low tax brackets and reducing their taxable income down the road. Over the course of their retirement, they could save over $80,000 in taxes simply by converting strategically.
Strategy #2:
Sequencing Withdrawals
Another strategy is managing the order in which you withdraw income. It’s not just about how much you withdraw—it’s also about when and from where. Coordinating IRA withdrawals with the age you claim Social Security can dramatically affect your tax outcome.
Many retirees benefit from withdrawing from taxable accounts first, then shifting to tax-deferred, and finally accessing tax-free sources like Roths. This sequencing can help “fill up” lower tax brackets without triggering unnecessary taxation of benefits. Timing truly matters.
Strategy #3:
Delaying Social Security
Delaying Social Security itself can also play a key role. Every year you delay benefits beyond full retirement age up to age 70, your benefits increase by about 8%. But just as importantly, delaying gives you a window of time to implement other tax-saving moves like Roth conversions or harvesting capital gains at favorable rates—all without impacting your Social Security tax exposure.
This delay period creates a strategic planning window—use it wisely, and you may avoid taxation of your benefits altogether.
Strategy #4:
Qualified Charitable Distributions
For those inclined toward philanthropy, another advanced strategy is the Qualified Charitable Distribution (QCD). After age 70½, you can donate directly from your IRA to a qualified charity—up to $100,000 per year. These donations count toward your RMD but don’t increase your taxable income.
That means lower AGI, lower potential Medicare premiums, and yes, less tax on Social Security benefits. It’s a win-win for charitably-minded retirees.
Jim and Linda’s
Game Plan
Let’s revisit Jim and Linda. By working with an advisor, they decided to delay Social Security, take modest IRA withdrawals early, convert part of their IRA to a Roth over five years, and use QCDs later in life. As a result, their Social Security benefits were never taxed, they stayed in lower tax brackets, and they gained the peace of mind that comes with predictability and control.
What seemed like a daunting and expensive retirement tax landscape became a manageable plan—with a trusted advisor guiding them every step of the way.
Avoiding Common Missteps
Unfortunately, many retirees miss these opportunities. They claim benefits too early, ignore the ripple effects of RMDs, and don’t coordinate income strategies with the tax code in mind. But the good news is that with the right guidance, these missteps are avoidable.
Your Retirement Partner
Since 1987
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About DWA
Dan White & Associates was founded in 1987, specializing in retirement and financial planning. We focus on addressing the distinctive financial needs of those nearing retirement and those who have already retired. Today, Dan White & Associates houses five financial professionals between our three offices located in Glen Mills, PA, Middletown, DE, and Lewes, DE. Within our offices, we proudly service over two thousand clients in the region.
Our main priority is getting a clear understanding of each client’s unique situation, by using a comprehensive questionnaire to aid us. Having full knowledge of our client’s situation ensures that we can better inform them about all of the possible financial strategies available to them. Next, we construct a plan together that will give our clients a clear path toward a safe and secure retirement. At our firm, we take a different approach than most advisors by priding ourselves in the educational aspect of retirement planning.
Find out how we can educate you and help make you more confident when it comes to making retirement decisions!