Barbara Ginty: It’s Easy To Overlook This One Thing When Planning for Retirement
Written by
Jaime Catmull
Edited by
Gabrielle Olya
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When you think of retirement planning, you probably think about what your ideal retirement looks like and how much money you will need to save to achieve that goal. You likely also consider which accounts you will utilize to save for retirement and optimize your withdrawal strategy. But there is one important factor that’s often neglected.
“The most overlooked piece [of retirement planning] is taxes,” Barbara Ginty told GOBankingRates. “Understanding and preparing for taxes — and taxes on Social Security benefits — is often a stumbling block and misstep for many retirees.”
What You Need To Know About Taxes and Social Security Benefits
Many Americans plan to rely heavily on Social Security income in retirement. A recent study found that the average American plans to rely on Social Security to provide 28% of their overall retirement funding — more than they plan to rely on personal savings (22%) and equal to retirement savings (28%).
If you are planning to make Social Security a significant part of your retirement income, it’s important to understand how taxes can play a role in how much you will actually receive in benefits.
“It is imperative you plan for your net Social Security benefits and not your gross,” Ginty said. “Additionally, being prepared for the taxation of Social Security to be adjusted — as it hasn’t since the taxation of benefits began in 1984 — is imperative. It is very possible the ‘cut’ to benefits will be made by changing the taxation of the benefits.”
How To Lower Social Security Taxes in Retirement
The best way to lower the taxes on your Social Security benefits is to lower your taxable income. One way to do this is to opt for a qualified charitable distribution (QCD), which lets you give your required minimum distributions to charity. These distributions are excluded from taxable income. You can also convert your retirement savings to Roth accounts, as withdrawals from Roth 401(k) plans and Roth IRAs aren’t considered part of provisional income calculations.
Another way to reduce taxes on your Social Security income is to move to a state that doesn’t tax these benefits.
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Gabrielle Olya contributed to the reporting for this article.
