If you pick up a dollar bill and go buy something, you actually have one dollar to spend. But, in virtually every other situation, your dollars are not treated the same. Some dollars are worth more than other dollars. Hmmm?
When you pull money out of your regular IRA or 401(k) you subject those dollars to taxation. Those withdrawals from pre-tax accounts get added to your other income, pushing you up higher in the tax brackets, and then get taxed at your applicable tax rate. If you are a resident of the majority of states with state income taxes, you also get taxed at your state tax rate.
As you move higher up the income tax brackets, you can find many financial landmines. For example, the Net Investment Surtax, the Medicare Surtax, and increases in Part B Medicare premiums are all lurking in the weeds for higher income earners. Staying lower in the tax brackets has the advantage of not only reducing your taxes, but helping stave off many other lesser known taxes.
Social Security is a powerful tool in your financial toolbox. Not only is it a source of stable (non-investment) income, but it is treated kindly in the tax code. For example, if you file Married Filing Jointly and make under $32,000, you owe no tax on your Social Security benefits! For Single tax filers, the income limit for no taxation on benefits is $25,000. But even when your income exceeds $44,000 for joint filers, or $34,000 for single filers, only 85% of Social Security benefits. So, 15% of Social Security benefits are not taxed! You could argue that a Social Security dollar is worth more than a $1 because of this tax advantage?
This is one of the reasons we think more Americans should delay taking Social Security until their Full Retirement Age (FRA), or even until age 70, so they lock-in a larger, tax-advantaged monthly income.
We can run analysis on your Social Security benefits to show you ways to enhance your benefits and strengthen your financial plan. You might also benefit from watching our Savvy Social Security Planning webinar.
Just remember, not all dollars are the same, and that is a good thing.