Even in retirement, you must file taxes, but that’s not bad news, which most take as such. Since 1935, a federal safety net has blanketed the country for the elderly, unemployed, and disadvantaged U.S. citizens. Social Security graces qualified retirees and their families with “replacement income.”
For retirees over the age of 65, rest assured that you can receive financial benefits based on your lifetime payroll tax contributions. The Social Security Administration (SSA) says that “this funding is part of the retirement plan for almost every American worker.”
Are you getting ready to receive Social Security? A financial advisor in Norman, OK, can help you plan and save for retirement!
Read on to understand better how social security retirement benefits function as retirement income.
What is Social Security?
What tells the government how much to pay you each month? Your Social Security record includes earned income, wages, or net income from self-employment. You have a history of earnings that defines your new paycheck.
Wages that cover you in Social Security were withheld from “Social Security” or “FICA.” For years, you have more than likely paid into the Social Security system automatically from each paycheck, setting you up for retirement on the backend of your working days.
The SSA informs: “Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.”
Citizens pay nothing on Social Security benefits if their total income is under $25,000. However, they must pay federal income taxes on their benefits IF they have other substantial income on top of their benefits. This includes wages, self-employment, interest, dividends, or other income to be reported and taxed.
You must pay tax on 85% of your Social Security benefits, based on these rules as defined by the Internal Revenue Service (IRS):
- File a federal tax return as “individual,” and your combined income* is
- $25,000 or lower: you do not have to pay income tax on your benefits
- $25,000 – $34,000: you may have to pay income tax on up to 50% of your benefits
- $34,000+: up to 85% of your benefits may be taxable
- File a joint return, and you and your spouse have combined income* that is
- $32,000 – $44,000: you may have to pay income tax on up to 50% of your benefits
- $44,000+: up to 85% of your benefits may be taxable
- Married and file a separate tax return, you will probably pay taxes on your benefits
The IRS worksheet helps figure out your total income taxes due if you do or will receive Social Security benefits. We understand that may and probably are not solid enough to feel confident when planning your retirement; that’s why it’s essential to gain financial advice.
After looking at your finances, we know what will affect your benefit amount right away, so don’t wait any longer. Learn more about us to begin a safe path to retirement.
Determining your Primary Insurance Amount (PIA)
A big list item to begin is figuring out your PIA. You can receive this benefit if you elect to start receiving retirement benefits at your normal retirement age.
What does this help you determine?
- If you retire early, your benefit reduces
- If you delay retirement, your benefit increases
Determining your PIA is vital to help you make your retirement age decision if life grants you that option. Three percentages (portions of average indexed monthly earnings) are added to determine your PIA.
The portions depend on when you:
- Turn 62
- Become disabled before 62
- Pass away before 62
Due to the Coronavirus Covid-19 updates, these portions (bend points) in the formula are:
- The first $1,024
- The amount between $1,024 and $6,172
- The amount over $6,172
See the 2022 PIA formula to read more on becoming eligible for old-age insurance benefits or disability insurance. Again, we know it can be overwhelming, so don’t do it alone. TRAC Advisor Group Inc. is here to help with retirement financial services and much more!
Full Retirement Age (FRA) vs. Normal Retirement Age (NRA)
As mentioned above, you can earn more from benefits if you retire later, at your Full Retirement Age. This is the same thing as Normal Retirement Age. If you plan to retire early, you will lose some of your SS benefits. This will help you determine that to get the ball rolling.
Your birthday and this NRA chart will help you determine both. Enter your birthday, and it will calculate for you!
Here’s a quick overview to determine your FRA/NRA. If you were born:
- 1937 and prior, your FRA/NRA is 65
- 1939 – 1959, your FRA/NRA varies (as numbers have slowly increased over time)
- 1960 and later, your FRA/NRA is 67
Early Retirement (age 62)
As mentioned above, retiring early will cost you benefits; doing so can result in a reduction of up to 30%. If retiring early, your benefit is reduced 5/9 of 1% for each month before NRA, up to 36 months. If exceeding 36 months, the benefit is further reduced by 5/12 of 1% per month.
Late Retirement (up to age 70)
Delaying your FRA and claiming later will increase your benefits by 8% each year. Maximum benefits can be claimed at the max-age of 70. Benefits won’t advance past this age.
What feels right? Will you retire early, late, or “right on time?” TRAC is here to simplify the retirement process for you!
Connect with a wealth management advisor to get ahead in the retirement savings process! You deserve to ease into your golden years with long-term confidence and gratitude for yourself and the systems in place to live well.
TRAC Advisor Group Inc. is a full-service, fee-based financial advisory firm in Norman, OK. We offer independent investment advice and help people withstand any type of market volatility with confidence.
As an independent investment advisor, we can offer alternative investments like numismatics and precious metals to diversify and hedge against uncertain times. With a straightforward and direct planning style, you can trust that we’ll keep you on track towards your financial goals.