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Two Ways You Can Lose Social Security Benefits Early On

Here are the two rules that will determine when you lose Social Security benefits:

  1. Earnings limits apply to benefit recipients younger than full retirement age.  Defining full retirement age:  Either age 66 for people born in 1943 through 1954, so for 2016 this limit is $15,720.  If you take benefits earlier than full retirement, Social Security will deduct $1 of benefits for each $2 earned over $15,720.
  2. Some people must pay federal income taxes on their Social Security benefits if they have what is called “other substantial income.” Fifty percent of Social Security benefits are taxable for individuals with a combined income between $25,000 and $34,000, and 85% of benefits can be taxed on individuals whose income exceeds $34,000. For couples, the 50 percent threshold begins between $32,000 and $44,000, while the 85 percent threshold begins for joint incomes more than $44,000.  So remember you must use 50 percent of your Social Security benefits toward the income calculation.  Example:  If you have a Social Security benefit of $1,500 a month, or $18,000 a year, you must take half the $18,000 towards the $25,000 limit.  So you will end u paying income tax on half of your benefits when you make over $16,000.  Take the $25,000 threshold, deduct half of the Social Security benefit of $9,000 and that equals $16,000.  Therefore, if you take an annual income of $16,000 of more, this causes taxation of Social Security benefits.

As you review you own situation, wisdom dictates reducing your qualified retirement money held in a 401(k) or IRA and move this money over to a Roth IRA, as soon as you can.   Of course you have to pay tax on this transfer, but do this as soon as you can manage paying this extra money.  It will save taxes on a larger amount of withdrawals from the 401(k) at retirement and keep you from losing some Social Security income due to added taxes.  When you consider that you must pay taxes on the combined growth of the 401(k) and on the Social Security benefit, this tax is quite substantial! 

I thought you might like to know the rules on how you can lose benefits long before you get to the age of actually drawing those benefits.  Knowing the rules allows you to keep more of your money.

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