Maximize Your Social Security Benefits

Social Security is an important source of income for many retirees. Unfortunately, it’s all too easy to make mistakes that significantly reduce your benefits. In fact, only 15% of Americans preparing for retirement strongly agree that they know how to maximize their Social Security benefits, according to a 2022 report from the Nationwide Retirement Institute.

The good news is many of these mistakes are avoidable once you’re aware of them. In this blog article, we’ll explore eight common mistakes people make when claiming Social Security benefits and how to avoid them, so you can maximize your income in retirement.

To maximize your Social Security benefits, avoid these eight potentially costly mistakes:

Mistake #1: Claiming Your Benefits at the Wrong Time

The age at which you claim Social Security benefits can significantly affect the amount of retirement income that you receive. By understanding the impact of claiming Social Security benefits at different ages, you can make an informed decision about when to claim benefits based on your financial needs and goals.

Your full retirement age (FRA) is the age at which you’re entitled to receive your full Social Security benefit amount based on your earnings history. For those born in 1960 or later, your FRA is 67.

To maximize your Social Security benefits, it’s best to claim them after you reach your FRA—if you can.

If you claim them sooner, your benefits will be permanently reduced by up to 30% depending on your age. On the other hand, if you delay claiming Social Security benefits beyond your FRA, your benefit amount will increase by 8% per year, up to age 70.

Before claiming your Social Security benefits, be sure to consider factors such as your other sources of retirement income and projected expenses. You can also use the Social Security Administration’s Retirement Estimator to help you determine the optimal time to start taking benefits.

Maximize Your Social Security Benefits

Mistake #2: Not Maximizing Your Spousal Social Security Benefits

Spousal benefits can be especially beneficial for couples with a significant difference in earnings history. That’s because the lower-earning spouse can receive a higher benefit amount based on the higher-earning spouse’s earnings history.

Your spousal benefits amount is generally equal to 50% of your spouse’s FRA benefit amount. For example, if your spouse’s FRA benefit amount is $2,000 per month, you could be eligible to receive up to $1,000 per month in spousal benefits.

To maximize your Social Security benefits, first be sure to understand the eligibility requirements for spousal benefits.

Specifically, you must be at least 62 years old and have been married at least one year to be eligible. If you’re divorced, you must have been married for at least ten years and not have remarried before age 60.

In addition, be careful not to claim your spousal benefits too early. If you claim them before your FRA, your benefit amount will be permanently reduced.

Also, keep in mind if you’re eligible for your own Social Security benefits based on your own earnings history, you’ll receive the higher of your own benefit amount or the spousal benefit amount.

Maximize Your Social Security Spousal Benefits

Mistake #3: Ignoring the Impact of Taxes on Your Social Security Benefits

Depending on your income level, up to 85% of your Social Security benefits may be subject to federal income taxes. To maximize your Social Security benefits, make sure you’re aware of these income thresholds.

The IRS uses your “combined income” to determine how your benefits are taxed. You can calculate your combined income by starting with your adjusted gross income (AGI) and adding back nontaxable interest, as well as half your Social Security benefits amount in a given tax year.

In 2023, single taxpayers with combined income between $25,000 and $34,000 may have to pay federal income taxes on up to 50% of your benefits. If your combined income exceeds $34,000, up to 85% of your benefits amount may be taxable.

These same percentages apply to joint taxpayers with combined income above $32,000 and $44,000, respectively.

Mistake #4: Ignoring the Earnings Test

If you start taking Social Security benefits before your FRA and continue to work, your benefits may be reduced if you earn more than a certain amount. In 2023, for example, your benefits will be reduced by $1 for every $2 you earn over $21,240—if you start taking benefits before your FRA.

To maximize your Social Security benefits while you’re still working, try to avoid claiming your benefits until you reach your FRA. Once you reach your FRA plus one month, your earnings no longer reduce your benefits, even if you earn more than the annual limit.

Alternatively, you may want to cut back your work hours to stay below the earnings limit. A financial planner can help you determine the best strategy to maximize your Social Security benefits.

Mistake #5: Not Considering How Divorce Affects Your Social Security Benefits

If you’re divorced, you may be entitled to claim Social Security benefits based on your ex-spouse’s earnings history. In general, those who meet the following criteria can receive a divorced spouse benefit equal to 50% of your ex-spouse’s FRA benefit amount:

  • Your ex-spouse is entitled to Social Security retirement benefits.
  • You were married for at least 10 years.
  • You’re at least 62 years old.
  • You’re currently unmarried (unless your ex-spouse has remarried).

It’s also important to note that your ex-spouse doesn’t need to have claimed their own Social Security benefits for you to claim your divorced spouse benefit.

To maximize your Social Security benefits after divorce, try to avoid claiming your divorced spouse benefit before reaching your FRA. Otherwise, the amount you receive will be permanently reduced.

In addition, if you’re eligible for your own Social Security benefits based on your own earnings history, you will receive the higher of your own benefit amount or the divorced spouse benefit amount.

Maximize Your Social Security Divorced Benefits

Mistake #6: Failing to Consider Survivor Benefits

If you lose your spouse prematurely, you may be eligible for Social Security survivor benefits. As the surviving spouse, you can receive a survivor benefit equal to 100% of your spouse’s benefit amount if you’re at FRA or older.

To maximize your Social Security survivor benefits, first be sure to understand the eligibility requirements. If you’re the surviving spouse, you must meet the following criteria:

  • Your deceased spouse must have worked long enough and paid enough Social Security taxes to be insured for benefits.
  • You must be at least 60 years old (or 50 if you have a qualifying disability).

Keep in mind your survivor benefits may be reduced if you claim them before you reach your FRA or are entitled to your own Social Security benefits based on your own earnings history. In addition, survivor benefits may be subject to federal income taxes if your income exceeds certain thresholds.

Maximize Your Social Security Survivor Benefits

Mistake #7: Not Checking Your Earnings Record

If your earnings record is incorrect or incomplete, it can result in a lower benefit amount, potentially costing you thousands of dollars in lost retirement income.

The easiest way to avoid this mistake is to check your earnings record annually to ensure it’s accurate and complete. You can create an account with the Social Security Administration (SSA) to keep an eye on your statement.

If you do find errors on your earnings record, be sure to contact the SSA as soon as possible to correct them. Fixing any inaccuracies before you’re ready to retire can help you maximize your Social Security benefits when it comes time to claim them.

Mistake #8: Not Seeking Guidance from Satori Wealth Management to Maximize Your Social Security Benefits

The decisions you make about when and how to claim your Social Security benefits can have long-term implications for your retirement income and financial security. Fortunately, a comprehensive retirement plan can help you avoid potentially costly mistakes, so you can maximize your Social Security benefits.

Satori Wealth Management can help you navigate the complexities of Social Security, as well as the trade-offs and considerations involved in claiming your benefits. We can also help you explore strategies for maximizing your retirement income while minimizing the impact of taxes.

If you’re ready to begin your retirement planning journey, schedule your Free RetireNow™ Checkup today.

IRMAA: The Sneaky Surcharge That Makes Medicare More Expensive

IRMAA is a sneaky surcharge that can increase your Medicare premiums if your income exceeds a certain threshold in retirement. 

When it comes to estimating your future expenses in retirement, one of the biggest unknowns is the cost of healthcare.

According to a 2022 Fidelity report, the average 65-year-old retired couple may need about $315,000 to cover healthcare expenses. However, depending on your lifestyle, how long you live, and a multitude of other factors, your healthcare costs may far exceed this estimate.  

Indeed, healthcare tends to be one of the largest–if not the largest–living expense for most retirees. Thus, the last thing you want is for your healthcare costs to unexpectedly rise, especially when you can prevent it.

That’s why it’s important to understand what IRMAA is, as well as the steps you can take to avoid it. 

What Is IRMAA?

IRMAA, short for income-related monthly adjustment amount, is a surcharge Medicare beneficiaries must pay each month if their income exceeds a certain threshold. 

To determine if you’re subject to IRMAA charges, the Social Security Administration uses your modified adjusted gross income (MAGI) from your tax return two years ago. For example, the 2023 income brackets for IRMAA apply to the adjusted gross income you reported in 2021. 

In 2023, the standard Part B monthly premium is $164.90. Those subject to IRMAA may see their Part B premiums increase by as much as $395.60 per month. Furthermore, IRMAA can increase Medicare Part D premiums by as much as $76.40. 

Therefore, IRMAA can significantly increase your healthcare expenses if you make too much money. While there are ways to appeal IRMAA if you don’t think it applies to you, the easiest way to avoid it is to keep your retirement income below the threshold. 

How Is IRMAA Calculated?

The Social Security Administration uses its own MAGI calculation to determine if you must pay IRMAA. To calculate this number yourself, locate your Adjusted Gross Income (AGI) on your tax return. Then, add the following:

  • Tax-exempt interest that you’ve earned or accrued (e.g., municipal bond interest).
  • Interest from U.S. Savings Bonds you used to pay for higher education.
  • Any income you earned while living abroad that was excluded from your gross income.
  • Income from Puerto Rico, American Samoa, Guam, and/or Northern Mariana Islands, which is not otherwise included in AGI. 

The total amount is your Medicare-specific MAGI. Below are the income brackets for 2023. These income thresholds generally change each year based on the inflation rate. 

Who Pays the Medicare Surcharge?

If you owe IRMAA, the Social Security Administration will let you know by sending you a letter. Here’s how it works:

  • When you first enroll in Medicare, you pay the standard Part B and D premiums.
  • If your income is high enough to trigger IRMAA, the Social Security Administration will send you a pre-determination notice.
  • If you believe the information that the SSA sends you is inaccurate, you have 10 days to contact them to dispute the notice.
  • Otherwise, the SSA will send you an initial determination notice within a few weeks of sending the pre-determination notice.

The determination notice has most of the same information as the pre-determination notice but also outlines an appeals process. If you decide to appeal the IRMAA decision, you must file Form SSA-44 and show that either your tax return was out of date or inaccurate or that your income has recently decreased because of a life-changing event. Examples may include:

  • Death of a spouse
  • Divorce or annulment
  • Marriage
  • Work stoppage or reduction 

If you are subject to IRMAA and have your Medicare Part B and D premiums deducted from your Social Security checks, you don’t need to take any action to pay the surcharge. If you pay your premiums separately, you’ll receive a bill to pay IRMAA.

Will I Avoid IRMAA Surcharges?

Strategies that Can Help You Avoid IRMAA

Keeping your income below the IRMAA threshold is the easiest way to avoid the Medicare surcharge. 

This may be challenging if you need to make a large withdrawal for an unexpected expense or in years when you must take required minimum distributions (RMDs). Fortunately, there are a variety of tax planning strategies that can help lower your Medicare-specific MAGI. 

Below are a few examples of strategies that can help you avoid IRMAA. 

Give Strategically

  • Donate cash to a donor-advised fund (DAF). A DAF allows you to make a lump-sum charitable donation and take the deduction in the current tax year. An additional benefit is that you don’t have to decide where your donation goes right away. Instead, you can take your time and direct your donations in the years that follow.
  • Donate appreciated securities directly to a charity or to a DAF. This strategy allows you to avoid the capital gains taxes you’d otherwise pay if you sold the securities outright. Since capital gains are included in the MAGI calculation, this strategy can help reduce your Medicare-specific income.
  • Make a Qualified Charitable Distribution (QCD). If you reach RMD age and don’t need the extra income, you can donate your RMD to charity—a tax planning strategy called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year. And since RMDs are included in the MAGI calculation, donating yours can help you avoid triggering the IRMAA surcharge.  

Use Down Markets to Your Advantage

  • Tax-loss harvesting. The IRS allows investors to offset realized capital gains with realized losses from other investments. If you have substantial losses, you may be able to completely offset your gains and potentially lower your taxable income. 
  • Roth conversion. Since account values typically decline in a negative market environment, so does the amount on which you’ll pay taxes when converting part or all of your traditional IRA funds to a Roth. Plus, since Roth IRAs don’t have RMDs, you can reduce your taxable income in future years. 

Max Out Tax-Advantaged Accounts If You’re Still Working

  • Traditional IRA or 401(k). Contributions you make to traditional retirement accounts reduce your taxable income. You can also take advantage of catch-up contributions once you turn 50. 
  • Health savings account (HSA). With an HSA, contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses. And like qualified retirement accounts, you can deduct your contributions from your taxable income in most cases. 

Satori Wealth Management Can Help

Planning for retirement can feel overwhelming, especially with so many variables and unknowns. The good news is you can minimize unnecessary expenses like IRMAA and make the most of your resources in retirement with a well-defined financial plan. 

An experienced financial planner like Satori Wealth Management can help you transition to the next phase of life with confidence. To get started, book your free RetireNow™ Checkup today.  

5 Powerful Questions to Ask Before a Roth Conversion

A Roth conversion can be a powerful tax planning strategy leading up to and in retirement—especially if you exceed the income threshold for contributing directly to a Roth IRA. Indeed, the benefits of a Roth conversion include tax-free distributions in retirement and the elimination of required minimum distributions (RMDs).

Yet Roth conversions don’t make sense for everyone. Thus, it’s important to weigh the costs against the potential benefits, as well as alternative tax planning strategies, before moving forward.

A Roth conversion allows you to convert all or part of your existing traditional IRA funds to a Roth IRA regardless of your income level.

What Is a Roth Conversion?

The IRS allows individuals—regardless of income—to convert a traditional IRA to a Roth IRA. A Roth conversion shifts your tax liability to the present, so you avoid paying taxes on withdrawals in the future.

Here’s how it works:

  • With a Roth conversion, you pay taxes on the amount you convert at your current ordinary income tax rate.
  • After you convert your traditional IRA to a Roth, any withdrawals you make in retirement will be tax-free if you’re over age 59 ½ and satisfy the five-year rule.
  • Since Roth IRAs don’t have RMDs, you can leave your funds to grow tax-free until you need them.

A Roth conversion can be particularly valuable in years when your income is below average, and you fall into a lower tax bracket. Nevertheless, there are a variety of factors to consider before converting your traditional retirement account funds to a Roth.

5 Questions to Ask Yourself Before a Roth Conversion

Here are 5 questions to ask yourself if you’re considering a Roth conversion:

#1: Is a Roth conversion a smart tax move right now?

In general, a Roth conversion makes sense if you expect your tax rate to be higher in the future than it is today. Thus, the most important question to ask yourself before a Roth conversion is, “Will paying taxes on the funds I convert today save me money in the long run?”

Of course, tax laws can change, and it’s impossible to predict the future. That’s why many people choose to take advantage of this strategy in years when their income is below average.

For example, if both you and your spouse work full-time, earn high incomes, and file a joint tax return, you may be in the highest tax bracket most years. But perhaps your spouse loses a large client, cutting their income in half for the year and lowering your joint income enough to temporarily put you in a lower tax bracket. In this case, a full or partial Roth conversion might make sense since your tax rate is lower than normal.

Alternatively, a Roth conversion may also be a smart tax move in years when the market is down. In most cases, your account balance will also drop alongside the market, reducing the dollar amount you convert. As a result, you’ll likely pay less in taxes than you would have before the market dropped.

While the concept of a Roth conversion may be relatively straightforward, the math can be complex. Be sure to work with a financial planner or tax expert, who can advise you on the best time to implement this strategy.

#2: How will a Roth conversion affect other aspects of my financial plan?

Depending on the amount of money you convert to a Roth IRA, your taxable income can increase substantially in the year you execute the conversion. Thus, it’s important to understand how a potential increase in taxable income may impact other areas of your finances—especially if you’re already in retirement.

For example, if you receive Social Security benefits, an increase in taxable income may trigger federal income taxes on your benefits. Currently, single filers earning more than $25,000 annually and joint filers earning more than $32,000 must pay federal income taxes on a portion of their benefits. Therefore, it’s important to know if a Roth conversion will push you over these thresholds.

In addition, an increase in your taxable income can impact your health insurance premiums if you’re in retirement.

For those who retire before age 65 and need to bridge the gap until you’re eligible for Medicare, an income boost may disqualify you from receiving The Premium Tax Credit. This credit helps subsidize the premiums lower earners pay on insurance through the Marketplace.

Similarly, retirees over age 65 may be subject to IRMAA, a surcharge you must pay in addition to your Medicare Part B and D Premiums if your income is over a certain amount.

#3: Do I have adequate tax diversification?

When planning for retirement, it’s often helpful to diversify your financial resources among various account types, including traditional (pre-tax) retirement accounts, Roth (after-tax) accounts, and taxable accounts. This can help you optimize your retirement income strategy and minimize your lifetime tax bill.

As a rule of thumb, it’s usually beneficial to have roughly a third of your assets in each type of account. So, if the majority of your assets are in pre-tax retirement accounts, a partial Roth conversion can help diversify your tax exposure.

On the other hand, converting all of your funds to a Roth IRA may push you too far in the opposite direction. While this isn’t necessarily problematic, it’s a good idea to work with a financial planner to determine your optimal mix of account types.

#4: Do I plan to transfer assets to the next generation?

One of the primary benefits of a Roth conversion is the elimination of required minimum distributions (RMDs). RMDs can increase your taxable income—even in years you don’t need them—and lower your retirement account balance over time.

Suppose you plan to leave your remaining assets to your children upon your death, for example. If most of your retirement funds are in a traditional IRA, you’ll have to take RMDs every year once you reach the applicable age (currently 73), gradually reducing its balance over time.

Even if you don’t spend your distributions, you’ll pay ordinary income taxes on them, lowering the amount you can leave your children. Plus, they’ll have to take taxable RMDs from the inherited IRA.

On the other hand, Roth IRAs don’t have RMDs. If you don’t need the income in retirement, you can let your funds appreciate tax-free within a Roth IRA, then transfer a potentially larger balance to your children upon your death. Moreover, your children can take tax-free withdrawals from the account upon inheriting it in most cases.

#5: Do I have enough cash on hand to pay taxes on the Roth conversion?

Finally, don’t forget you must pay ordinary income taxes on the amount you convert to a Roth IRA in the tax year you make the conversion. Thus, you’ll need to have enough cash on hand to pay your tax bill.

While you can pay the taxes with funds from your retirement account, most experts advise against this approach. That’s because withdrawing money from a tax-advantaged account can negate many of the tax benefits of doing the Roth conversion in the first place.

Meanwhile, if you liquidate funds from investments within a taxable account, you may end up triggering capital gains taxes. This can also diminish the benefits of converting to a Roth IRA.

Ideally, you’ll have enough cash available to avoid disrupting your investment accounts. If not, you may want to start raising cash in anticipation of a future Roth conversion.

Factors to Consider Before a Roth Conversion

Satori Wealth Management Can Help You Determine if a Roth Conversion Is Right for You

A Roth conversion can be a valuable tax and estate planning strategy. Yet due to its complexities, it may not right for everyone. Be sure to consult an experienced financial planner or tax expert to determine if this strategy makes sense for you.

Satori Wealth Management specializes in the financial planning needs of those nearing and in retirement. We can help you develop a retirement plan that considers your personal tax situation and helps you achieve your financial goals. Please schedule your complimentary RetireNow Checkup™ to see if we may be a good fit.