Taking Social Security Benefits

Ed Slott & Company

The lowdown on what you can expect at retirement age

Posted June 28, 2010

By Ed Slott & Company

The combination of guaranteed benefits for life, cost of living adjustments, and spousal coverage makes Social Security one of the most valuable sources of retirement income.

If you were born between 1943 and 1954 you qualify for full Social Security benefits at age 66, which is referred to as “Normal Retirement Age.” You may start collecting as early as age 62, but your monthly checks will be reduced by about 25% for the rest of your life. The normal retirement age increases gradually for individuals born between 1955 and 1959, until it reaches age 67 for those born in or after 1960.

Since 1983, Social Security benefits have been subject to income tax if the recipient’s total income exceeds a certain amount. You need to crunch the numbers to see how much of your benefits will be taxed at your regular income tax rate. Add up your taxable income from pensions, wages, interest, dividends and other sources, plus tax-exempt interest income and one-half of your Social Security benefits.

For 2009, if you are married and filing jointly and the total from all of those sources is:

• Less than $32,000: your Social Security benefits will not be subject to income tax
• Between $32,000 and $44,000: up to 50% of your benefits will be taxed
• More than $44,000: up to 85% of your benefits will be taxed

If you are single and your total income from all sources is:

• Less than $25,000: your Social Security benefits will not be taxed
• Between $25,000 and $34,000: up to 50% of your Social Security benefits will be taxed
• More than $34,000: up to 85% of your benefits will be taxed

If you are married, file separately, but lived with your spouse for any part of the year:

• 85% of your benefit is subject to tax, regardless of your income amount

The calculations can get tricky, so you might want to review IRS Publication 915 (Social Security and Equivalent Railroad Benefits) for more details.

Also keep in mind that receiving social security benefits may impact your ability to deduct traditional IRA contributions. Applicable worksheets are available in IRS Publication 590 (Individual Retirement Arrangements) for determining what affect, if any, receipt of social security benefits will have on your IRA deductions.

Ed Slott and Company has been called "The Best" source for IRA advice by The Wall Street Journal, and "America's IRA Experts" by Mutual Funds Magazine. Ed is a widely recognized professional speaker and author. Get more IRA information from America's IRA Experts.