The IRS regulations for taxes on Social Security are confusing. As discussed in a Wall Street Journal article titled, “When Uncle Sam Wants His Money Back”, as much as 85% of a recipient’s social security benefit can be taxed. A person earning as little as $25,000, could owe taxes on up to 50% of his or her benefit.
To minimize taxes owed on Social Security income, one possible strategy is to convert your IRA into a Roth IRA. Any distribution from a traditional IRA will be viewed as income which could affected your social security benefit. However, qualified distributions from a Roth IRA are not taxed and therefore don’t effect benefits. It is important to note that the amount your transfer from a traditional IRA to a Roth IRA counts toward your taxable annual income so it is best to convert before Social Security benefits begin.
Another strategy is to delay taking social security benefits. This strategy will increase your actual payouts with an 8% increase every year that you delay benefits from ages 67 to 70. Until age 70, try to use retirement accounts when money is needed. Using up retirement accounts also can reduce your require minimum distributions after 70 ½ which can lower taxable income under a traditional IRA.
Finally, consider converting income so that it is not counted for taxes if you are already collecting benefits. For example, a certificate of deposit (CD) or other non-qualified account generating extra income may trigger Social Security taxes. Converting to a deferred annuity to will defer income taxes.