Millions of Americans rely on Social Security for retirement income, but taxes can eat into benefits. Federal rules allow up to 85% of Social Security benefits to be taxable based on combined income thresholds. However, retirees can use legal planning strategies to increase their Social Security income and reduce taxes.
One strategy is to wait until 70 years old to apply for Social Security, which can result in the maximum benefit. However, this may lead to higher taxes on that income if not planned carefully.
Some states do not tax Social Security benefits, and moving to these states can help save money in retirement. States like Florida, Texas, and Tennessee have no income taxes, but taxes on IRA withdrawals, pensions, and property taxes should be considered.
Another strategy is to withdraw funds from Roth accounts before applying for Social Security. This can help reduce the tax burden and avoid higher tax rates. It's also essential to contribute to 401(k) plans, IRAs, and other investment accounts to supplement Social Security income.
Partial Roth conversions can be a better option than straight withdrawals from traditional retirement plans, especially if the money is not needed immediately. This can help minimize taxes and maximize Social Security benefits in retirement.
