Income Stacking with Social Security
Discover how Social Security impacts your retirement taxes and learn strategies to manage them effectively. Explore tax diversification tips, including the benefits of permanent life insurance, to optimize your financial planning. Plan smarter with Pinnacle Peak Insurance Group, Inc.
MAPFL BLOG
Social Security and Taxes: What You Need to Know!
So let’s talk about Social Security and how that works in retirement. Most people are very confused about how that affects their future taxation. Is it taxable? Is it not taxable? Well guess what. It’s absolutely taxable. And that is your foundation where taxation begins. And so it starts social Security and any other income that you have coming into your life.
Pensions IRAs for one k distributions rental income all stacks on top of Social Security. Nobody realizes that. So as you stack higher and higher you’re getting pushed into a higher tax bracket. So why not consider some taxation diversification strategies. So that way, as you are stacking your taxable assets on top of that IRS form, you get to leave one little revenue stream off.
And let’s try to avoid kicking you into that higher tax bracket. There are strategies out there that most people are unfamiliar with. Again, once you learn about permanent life insurance and educate yourself properly on how you can utilize it in retirement, you will be a happy person.
Get Custom Service Quote
Let's Get Connected!
Bring your health journey to life! Get a custom health plan consultation today. Let's connect and create a plan that fits your life perfectly.
Yes—sometimes. The IRS taxes up to 85% of your Social Security depending on your “combined (provisional) income.” That’s your AGI + tax-exempt interest + ½ of your Social Security. Internal Revenue Service+1
- Included: wages, pensions, traditional IRA/401(k) withdrawals, dividends/capital gains, tax-exempt interest (e.g., muni bonds), plus ½ of your Social Security.
- Commonly excluded: qualified Roth IRA withdrawals (not in AGI); however, Roth conversions do raise AGI in the conversion year. Internal Revenue Service+1 Internal Revenue Service+1
- Single: below $25,000 = 0% taxed; $25,000–$34,000 = up to 50%; > $34,000 = up to 85%.
- Married filing jointly: below $32,000 = 0%; $32,000–$44,000 = up to 50%; > $44,000 = up to 85%. These are set by federal law and haven’t been indexed. Social Security+1
Yes. Traditional IRA/401(k) withdrawals increase AGI, which can push more of your Social Security into the taxable range (up to 85%). By contrast, qualified Roth IRA withdrawals generally don’t raise AGI and don’t increase the taxable share of Social Security. Internal Revenue Service+1
- Maintain tax-free buckets (e.g., Roth IRAs) for flexibility in high-income years; qualified withdrawals aren’t included in AGI. Internal Revenue Service+1
- Use non-market sources carefully (e.g., policy loans from permanent life insurance). Properly structured policy loans aren’t income while the policy stays in force; but if a policy lapses/surrenders with a loan, gains can become taxable—so design and monitoring matter. Internal Revenue Service+1
Keypoints for Income Stacking with Social Security
- Social Security and Taxation:
- Mario explains that Social Security is taxable in retirement. Many people are confused about this aspect, but it serves as a foundational element in determining taxation for retirees.
- Stacking of Income Sources:
- Income sources such as pensions, IRAs, 401(k) distributions, and rental income are all considered in conjunction with Social Security.
- As these additional income sources “stack” on top of Social Security, it can push retirees into higher tax brackets.
- Tax Diversification Strategies:
- Mario suggest considering taxation diversification strategies to mitigate the impact of this income stacking.
- These strategies could potentially help retirees avoid getting pushed into a higher tax bracket, optimizing their overall tax situation.
- Permanent Life Insurance as a Retirement Strategy:
- One of the strategies mentioned is permanent life insurance, which Mario says can be beneficial if retirees educate themselves about how to properly use it.
- By utilizing these strategies, retirees can potentially leave some revenue streams off their tax forms, reducing the tax burden.
Podcasts / Blogs Latest Episodes
Income Stacking with Social Security
Additional Points (for Enrichment)
- Importance of Understanding Tax Brackets in Retirement:
- Many retirees are unaware that their various income sources can push them into higher tax brackets, leading to higher tax obligations. Understanding how income sources are taxed is essential for effective retirement planning.
- Tax-Efficient Withdrawal Strategies:
- In addition to permanent life insurance, there are other strategies to consider, such as Roth conversions or using tax-free accounts (Roth IRAs, for example) that don’t add to taxable income in the same way as traditional accounts do.
- Timing and Planning:
- It’s important to plan for taxes in retirement ahead of time. Delaying Social Security benefits, managing taxable withdrawals carefully, or investing in tax-advantaged products can help reduce tax burdens.
- Financial Education:
- Mario emphasizes the importance of financial education and encourages individuals to learn about options like permanent life insurance to make informed decisions.
Social Security benefits are taxable, and the amount of taxation depends on your total income from all sources. If your combined income exceeds a certain threshold, a portion of your benefits may be taxed. The threshold varies based on your filing status:
- $25,000 for single filers, heads of household, or qualifying surviving spouses.
- $32,000 for married couples filing jointly.
- $0 for married couples filing separately who lived together at any time during the year.
The formula for determining how much of your benefits are taxable includes adding up half of your Social Security benefits and all other income (like pensions, IRAs, 401(k) distributions, and rental income). This “stacking” of income can push individuals into higher tax brackets. Tax diversification strategies, such as utilizing permanent life insurance, can potentially help reduce the impact of these taxes by creating non-taxable income streams.
For more detailed guidance, you can refer to IRS Publication 915, which covers Social Security and equivalent railroad retirement benefits taxation. You can also consult the IRS worksheet provided in Notice 703 to calculate whether your Social Security benefits are taxable
For direct access to these IRS guidelines, visit:
- IRS Publication 915 on Social Security Benefits(IRS).