One of the highly discussed topics is the Social Security timing debate. It is widely accepted that tax planning plays a crucial role in investment strategy and deferring the Social Security benefit can help in tax efficiency in the long run for the retirement income strategy.
One of the best ways to control taxes is to draw down traditional tax-deferred assets before collecting Social Security. Based on the time of drawing Social Security there can be three tax treatments
- It won’t be having effect from federal income tax
- Up to 50% of it will have effect from federal income tax
- Up to 85% of it will have effect from federal income tax
Most people like to retire at age 62 and if they do, withdrawal from a tax-deferred retirement account will be made which is usually the Individual Retirement Account (IRA). But this could reduce the future required minimum distributions(RMDs) as it is calculated by dividing the retirement account balance with the IRS life expectancy factor. By this way, smaller distributions can help people control their income since their RMD is considered ordinary income. Therefore, having a lower level of income by the time people collect will turn out to be a better position for them to receive Social Security payment that is not subject to tax.
it is a known fact that one cannot predict the future of the economy as a lot of factors are involved. To be on the safe side, it shall be assumed that the population of retirees increases. A good plan will be based on the current scenario and the flexibilities of the future. Therefore, the long-term plan should not be affected by the changes in the future.
A realistic lifespan
Statistics say that a man who is 65 years old today will live up to his 86 years and in case of women it is 89 years. While planning it is always good to consider the life expectancy of the couple. While making a rough life expectancy factors such as current health, lifestyle, family history and so on can be used.
The real return
People can get their Social Security benefit by the age of 62 but a reduced percentage of the full benefit amount will be given. Whereas, if people collected the Social Security benefits at their full retirement age then they will get dull benefit amount. There will be 8% increase each year until the age of 70. Also, the 85 increases will be adjusted for inflation.
The ultimate choice
The ultimate choice lies in the hands of people. There could be a number reasons for one to withdraw the benefits of Social Security and it could even be the best option for them.
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