4 Smart Moves for Retirees Ahead of the Social Security Overhaul
Written by
G. Brian Davis
Edited by
Zuri Anderson
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The Social Security Administration now projects insolvency for its OASI Trust Fund by late 2032, after spending has accelerated under the One, Big Beautiful Bill Act.
That means something will have to give over the next seven years. The government could trim benefits, raise the retirement age for benefits, raise taxes — or likely a combination of all three.
What should retirees and those nearing retirement do to prepare for changes to Social Security?
Consider Roth Conversions
The One, Big Beautiful Bill Act included some significant tax cuts, which makes now a good time to prepay taxes.
In a Roth conversion, you move money from your traditional IRA to a Roth IRA. That triggers income taxes on the converted amount, but once the money is in your Roth account, it compounds tax-free and you pay no taxes on withdrawals.
“Tax rates will almost certainly rise again in the future, possibly as soon as following the 2026 midterms,” notes certified public accountant (CPA) and tax attorney Chad Cummings of Cummings & Cummings Law.
Roth conversions offer a secondary benefit, as well. One proposed change to Social Security benefits includes means-testing, potentially locking out recipients with a modified adjusted gross income (MAGI) above a certain threshold. But withdrawals from Roth accounts don’t count toward your MAGI, leaving the income potentially invisible to the SSA.
Downsize
Currently, homeowners enjoy the IRS Section 121 exclusion on capital gains tax from their primary residence. They pay no taxes on the first $250,000 ($500,000 for married couples).
That loophole could disappear as the government tries to shore up revenue and raise taxes on higher earners. Many retirees end up downsizing and moving into a single-story home anyway, so now could prove an ideal time.
Just watch out for homes that come with condo or homeowners association fees. Unlike your principal and interest payment on a mortgage, which freezes if you borrow a fixed rate loan, condo and HOA fees typically go up every year. That stretches retirees on a fixed income.
Take the Hit on Capital Gains Now
Some Democratic candidates (including Joe Biden before dropping out of the 2024 race) have proposed raising capital gains tax rates for higher earners, as reported by the Tax Foundation. As the federal spending deficit grows, expect to see more of these proposals.
“If you’ve been thinking about selling a rental, cashing out a deferred compensation plan or recognizing other capital gains, now is probably the best time from a tax standpoint,” urges Cummings. “Capital gains tax will likely increase in the future, even more so than ordinary income brackets.”
Find a Fun Retirement Gig
While the proposal to raise the full retirement age for benefits to 69 likely won’t impact current retirees, other proposals might. Take for instance the proposal to base Social Security cost-of-living adjustments (COLA) on chained-CPI rather than the current CPI-W, which would cut benefits for most retirees.
The less you rely on Social Security benefits to cover your daily living expenses, the better. Consider picking up a fun part-time or flexible gig that brings in some extra income. Beyond the money, you can spend more time around other people, have fun, and stay active and engaged.
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