Practical Applications of How Social Security Coordination Can Add Value to a Tax-Efficient Withdrawal Strategy

Abstract

The spike in marginal tax rates associated with the taxation of up to 85% of an individual’s Social Security benefit is termed the “tax torpedo.” In <b><i>How Social Security Coordination Can Add Value to a Tax-Efficient Withdrawal Strategy</i></b>, from the Fall 2021 issue of <b><i>The Journal of Retirement,</i></b><b>William Reichenstein</b> and <b>William Meyer,</b> principals at <b>Social Security Solutions</b>, <b>Inc.</b>, demonstrate how marginal tax rates can spike when a retiree collects both Social Security benefits and income drawn from tax-deferred accounts in the same year. The authors use a series of case studies to model how financial advisors can identify optimal tax-efficient strategies for clients who are able to delay the start of Social Security benefits. In the early years of retirement, income is drawn from tax-deferred accounts, and additional tax-deferred funds are converted to Roth accounts. When Social Security benefits later begin, the Roth accounts can be drawn upon tax-free as needed. This strategy can add significant value to portfolios by reducing income taxes and Medicare premiums.