The Hidden Tax Cost of Delaying Social Security
Written by
Travis Woods
Edited by
Rebekah Evans
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Some retirees choose to delay their monthly Social Security checks in order to boost the overall amount of their benefits.
But they risk an overlooked consequence — bigger benefits can often mean bigger tax bills, especially when combined with other income.
Here is the hidden cost if you decide to delay Social Security.
Just How Much More in Taxes Could You End Up Paying?
Retirees who delay Social Security benefits in order to get bigger checks “can push [themselves] from paying tax on 50% of their benefits to paying tax on 85% of their benefits if they have income from other sources, such as interest on savings accounts or taxable retirement benefits,” said Gene Bott, certified public accountant (CPA) and tax advisor with Kevin O’Leary’s Tax Hive.
“This can be a nasty surprise,” Bott added, noting that income sources that can trigger this include required minimum distributions (RMDs) from retirement accounts, unexpected interest income, capital gains on stocks and other investments and state tax refunds.
Instead, Calculate Ahead of Time To Avoid a Higher Tax Bill
To counteract this, Bott recommended that taxpayers should tabulate just how much they will need in retirement. “As you do,” he said, “calculate whether those needs could put you in the 85% taxable Social Security benefits bracket. You may encounter issues you can avoid by maintaining a well-balanced retirement distribution between Roth IRAs and traditional retirement accounts.”
Bott also suggested timing out your retirement benefits. For instance, Bott said if you opt to have a mix of Roth IRA and traditional retirement account options, “you may be able to avoid additional tax simply by taking the right balance of distributions between the two.”
In the end, delaying your Social Security benefits isn’t inherently bad — but the tax implications of doing so deserve just as much consideration as does the size of a monthly benefits check.
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