By Dennis Kagel ChFC, Chartered Financial Consultant
What’s more valuable, a dollar you receive from a retirement plan (401k, IRA) or a dollar you receive from Social Security? When I ask someone this, I often get a quizzical look. There is only one right answer, and it’s the Social Security dollar. The reason for this is because 100 percent of every dollar coming out of retirement plans is taxable, and the maximum amount of each Social Security dollar that can be taxed is 85 percent.
This fact alone creates a retirement planning objective that will put more net dollars into each person’s pocket, and this objective is to minimize the taxation on your Social Security and minimize the taxation on the money coming from retirement plans. Simply by rearranging some investments from taxable accounts to tax-free accounts, most people could potentially end up with a significant amount of more net dollars in their pocket! No matter what type of planning you do there is one undeniable fact, and it’s the only thing that matters: It’s not the total amount of money that you receive each month that counts, it’s the amount you are able to keep after taxes that counts. This is the only money you can spend!
If you are married and filing taxes jointly, and your modified AGI (adjusted gross income) is at least $32,000 and not more than $44,000, then up to 50 percent of your Social Security will be taxed. If your modified AGI is over $44,000, then up to 85 percent of your Social Security will be taxed. For single individuals the numbers are $25,000 and $34,000.
I must be clear that when I say “up to 85 percent of your Social Security will be taxed” I mean that 85 percent of your Social Security benefit will be included in your taxable income when determining your total income tax for the year. The 85 percent does not mean that your Social Security benefit is taxed at an 85 percent tax rate.
Keeping the rules for taxation of SS benefits in mind, wouldn’t it be a wise move to reduce your modified AGI to as low a figure as possible, so that less or none of your Social Security would be taxed? Most people respond to this thinking that they can’t live on such a low annual income of $32,000 or less. That’s not what we’re talking about doing. What if the majority (even 100 percent) of your retirement income was coming from tax-free accounts? Just think about this scenario for a moment: You could be receiving $100,000 (or more) annually from tax-free accounts and, assuming that Social Security was the only other source of income, you would pay no tax on any of your Social Security and no tax, of course, on the tax-free money you receive.
There are very attractive options available today where you can move qualified money (401k, IRA) to tax-free accounts. I agree with Ed Slott, one of America’s most widely known tax experts when he says, “You should move your money from accounts that are forever taxed to accounts that are never taxed.” This is just one of the currently most powerful financial strategies we work with. You owe it to yourself and your money at least to be informed about your options.
Dennis Kagel will be hosting financial workshops at the ISU Alumni Center, 1101 N. Main St., Room # 117 on Thursday, Sept, 8th AND on Monday, Sept. 12th at 6:00 PM. He will be dealing with the subjects referred to in this article in greater detail. These seminars are open to the public. Call 866-247-2277 for reservations.
Dennis Kagel is the president of Dennis Kagel Financial Services located at 321 Susan Drive, Suite A, in Normal. You may call 309-454-9171 to schedule a no-cost and no-obligation visit to learn more about your financial options.