If you plan on collecting Social Security benefits at some point, it’s important to know about a few of the program’s details you may not be aware of – details that can negatively impact your retirement savings if you’re not careful.
Here are a few potential Social Security traps to look out for so you can maximize the benefits you worked hard to earn:
Required Minimum Distribution (RMD)
If you have tax-deferred retirement accounts, like traditional IRAs and 401(k)s, RMD is the minimum amount you must withdraw from these accounts each year after you reach the age of 70 1/2. These distributions are treated as ordinary income, and if you don’t take the required distributions in any year, you may have to pay a 50% excise tax on the amount not distributed.
Not all retirees are eligible for Social Security
It’s surprising to most people to learn that not every type of work counts towards earning Social Security benefits. Make sure to find out whether your employer takes part in Social Security or if your position qualifies you for it. It’s important to know exactly where your retirement benefits will be coming from before making any financial decisions.
Taxes on your Social Security benefits
When your earnings exceed a certain level, a portion of your Social Security benefits may be taxable – up to 85% of your benefits, in fact! Be sure to make note of any income sources that are normally tax-exempt, such as municipal bonds – those will be factored into your total income when the IRS calculates any tax on your Social Security benefits. You should also be aware that when converting a Traditional IRA to a Roth IRA you will have to pay income tax on the conversion.
Benefits may be lowered while working
Limits may be placed on your Social Security benefits if you’re earning more than a specified amount of separate income. You’re allowed to collect Social Security and earn from your employer at the same time, but there is a limit where your benefits will be reduced by $1 for every $2 you earn above the allowable amount. So, if you’re planning to work past the age of 62 and you could potentially earn more than the maximum allowable amount, consider putting off collecting Social Security benefits until you begin working less or not at all