Today TaxMama® hears from Dave in the TaxQuips Forum with a quickie little question. “If I retire at 62 or 63 with Social Security and IRA distributions (not Roth) what will my tax liabilities be? For example: Monthly: $1700 from social security and $3,000 from IRA for total of $4,700. Do I pay income tax on both? Will I have to continue to pay Social Security and Medicare? Is there a different tax bracket for retired?”
Team TaxMama doesn’t do your computations for you. That’s what tax planners are for – to help you evaluate different alternatives, so you can make informed decisions.
Before I answer your other questions, let me alert you to something you might not realize. When you start collecting Social Security early, at 62 or 63, if you work and earn more than a certain amount, you will have to repay the Social Security Administration (SSA). For 2012, the maximum allowable earnings are $14,160 – anything over that and you repay the SSA $1 for every $2 you earn.
So you get penalized three times –
1) You get the lowest possible monthly benefit.
2) You have to pay back part of your benefits.
3) Your wages/earnings are apt to cause your Social Security income to be taxable.
If you can hold off collecting SS benefits until you reach the retirement age for your age group, you may be better off (for many baby-boomers, it is age 66). Your benefits will be higher – and you won’t have the earnings limit. This affects people retiring early, since they often find themselves either needing the money or needing something to do after a year or so of retirement.
Now to your questions.
1) Do I pay income tax on both?
You must pay taxes on the IRA distributions. The SS income is only taxable when your taxable income plus half your Social Security income exceeds $30,000 ($25,000 if single). IRS explains how it works here.
Since your IRA alone will add up to $36,000, up to 85% of your Social Security benefits will be taxable. Some tax planning can help determine the optimum IRA distribution to avoid taxing your Social Security benefits at all.
2) Will I have to continue to pay Social Security and Medicare?
Only if you work. Not on your SS or IRA earnings.
3) Is there a different tax bracket for retired?
Nope. And you don’t even get a higher standard deduction – until you reach age 65. Consider reading IRS Publication 554 – Tax Guide for Seniors. You’ll learn more about the tax system and how it affects you once you reach age 65.
And remember, you can find answers to all kinds of questions about retirement, and other tax issues, free. Where? Where else? At www.TaxMama.com.[Note: If you were subscribed to the e-mailed version of TaxQuips, you’d be getting other exciting news and tips by e-mail, that never appear on the site. Please click on the join TaxMama.com link – it’s free!]
Please post all Comments and Replies in the new TaxQuips Forum .