Social Security is subject to a unique tax treatment. Part of your benefit is taxed currently, and part is tax-free. But the portions of what is taxed and what is tax-free are rather fluid, and will depend in large part on the amount and most importantly, the sources of your income.
To determine the taxable portion of your Social Security, the IRS takes all of your income and, figuratively speaking, puts it in a bucket to determine the total. The more that ends up in this bucket, the greater the percentage of your Social Security benefit that is taxable.
But there is one very important thing to understand about these tax calculations: not all of your income necessarily goes into this bucket. If and how much of your income goes into the bucket is in large part based on the source of that income.
For example, 100 percent of the income you receive from your 401(K0, IRA or other tax-postponed retirement plan goes into the bucket, but only 50 percent of the income your receive from your Social Security goes into the bucket.
Now think about that for a minute. If only 50 percent of the Social Security benefit you receive is included, doesn’t it stand to reason that your taxable income might reduce if a larger portion of your total income came from Social Security?
To make this important point clearer, assume that we have two individuals. They both have the same total income.
Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.