I turned 62 in February 2006 and took early Social Security in June. Here are a few observations about doing this, and whether to wait until age 63 or 64. I definitely endorse taking it earlier than your “normal retirement age,” but you have to consider all the tax aspects of the Form 1040, Line 20 tax. [See my comment below; I just reversed the early decision and repaid the benefits I received for the first part of this year.]
Based on my experience, I definitely recommend having your early retirement benefits begin punctually on January 1, not in mid-year. [This suggestion is true regardless of the age you begin.] Go to your local SSA office about two months before you want your benefits to begin. I started mine in mid-year and it made my “earnings test” rules more complex. I am now doing things like figuring out how to postpone income about three more weeks, until next year. (We all hate the income tax!)
I recommend you should drain out – distribute – all of the funds from your traditional IRAs and 401(k) plans before beginning SS benefits. Your after-career life should begin as a vacation. Take a vacation and think about what you want to do as an “after career.” If you wait to start distributing IRA and 401(k) funds, you will end up paying a higher tax rate on your distributions.
You can finance your first few years after age 62 by drawing down tax-sheltered savings. Allow Social Security to phase out its discount penalty. When you take early retirement from Social Security, they impose a reduced pension for the rest of your life. The longer you wait, this penalty goes away. Even after your “normal retirement age,” your monthly pension will continue to increase based on the price index formula.
Your financial planning should emphasize distributing retirement savings from traditional IRAs and 401(k) plans before starting Social Security, because these are taxable. After you start to draw Social Security benefits, the marginal tax rate on these distributions will be higher.
I didn’t drain my traditional IRA, but I wish I had done. [I am now going to take IRA distributions instead of SS for a year or so.] But I am thoroughly enjoying doing absolutely nothing by way of earning money, except for my H&R Block hobby-job, which I love. Free advice and sharp tax analysis. I am also highly opinionated.
Come make an appointment to talk with me about your personal income tax situation, from a fully confidential libertarian point of view. Phone 623-872-9112.
My office is on 107th Avenue, northwest side of Indian School Road, in Phoenix, 85037.
Today I went to the Social Security office and sat for two hours in its crowded waiting room. I turned in the form to rescind my Early Retirement decision, and I repaid six months of benefits, which I had received since June.
My decision was based on a focus to distribute funds from taxable IRA accounts before taking Social Security, in order to avoid the extra income tax on Form 1040, line 20 next April 15. This would have been $850.
The only negative aspect is that I might die before I get all my original tax payments, plus compound interest, out of the system.
Joe, I agree with you, and disagree with your correspondent from Phoenix. In fact I recently blogged as to the downside of going through retirement with absolutely _no_ tax-deferred income. http://engineeringmyfinances.blogspot.com/2007/07/should-you-convert-all-of-your.html
Yes, I realize the “Line 20″ issue of taxation of Social Security benefits. But with some planning you can reduce the taxes you pay in the long run.
Even if inflation pushes my Social Security benefit to $50,000/year so that as a single person the first $1.00 of taxable distributions results in $1.50 showing up as $1.50 of AGI on my tax return, I will not pay any taxes at all on that amount. I would not pay any taxes until the AGI income exceeds standard deduction and personal exemptions, which total $9800 for a single person this year. So why would I want to drain my tax-deferred savings to zero paying taxes at my marginal rate in the process, when if I instead spread part of it out over a number of years of retirement I would pay _no_ taxes?
My own tax-deferred savings are on the high side. What I’m doing (in my 50′s right now) is to convert some of my tax-deferred savings to Roth, before the income tax rates go back up. I’m planning to retire at 66, and depending on the situation may wait until the age of 70 to start Social Security. Between retirement and age 70, I would convert additional tax-deferred savings to Roth, but would not drive the tax-deferred savings to zero. By doing the conversion while not drawing Social Security while doing the conversion, I side step the “Line 20″ effect. Depending on your particular circumstance, that approach may be to your benefit as well.
I agree that reducing tax deferred savings, 401(k) plans, traditional IRAs, to zero might be the extreme, corner solution. There might well be a moderate, middle way.
The Line 20 tax is just a formula that includes other income from savings (DB pensions, capital gains, dividends, and IRA distributions) a second time, on Line 20. The amount is measured by the size of your SS benefit multiplied by your total other income: 85% or 50%). Therefore, if you know the formula, you can get outside it.
For example, the Line 20 tax is capped at a total equal to 85% of your SS benefits. That much is added to your Adjusted Gross Income total. During that range of income calculations, your gross income is higher by 85%.
After you pay up to that full level in the of tax bracket, then it disappears.
The tax rate becomes Zero for weathier individuals.
Thanks for mentioning all the important points about early social security retirement. I am sure that this will be of great help to everyone who is planning for a retirement.
I retired this year at 64. I gave my original date of retirement as July 1. I changed this to August 1. I received a notice from the SSA advising that because the form they required asking how much I expected to earn this year said $44,000, that I owed $16,000, and that they would hold the July payment towards this balance. I thought the amount we made before we retired (in my case around $38,000), was not used in the calculation of how much you could make in the years before full retirement (66 in my case). If I owe this much money already, I have to cancel my retirement. Can I do that? The SS agent advised when I retired that “we don’t care if you are Bill Gates before you retire or after you reach full retirement. You can only earn $1,180 each month from August to December 2009.” Does anyone know if this is correct?
The most comprehensive information I have found on this subject todate. I will be back soon to follow up on this subject.
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