How Social Security, taxes, Medicare and your investment accounts can work together

Based on a Retirement Compass Radio conversation with Stonebridge co-founder and financial advisor Tim Kulhanek

Saving Was Only the First Phase

For much of your working life, retirement planning may feel straightforward: contribute regularly, take advantage of an employer match when available and give your savings time to grow. Then retirement arrives, and the job of your money changes.

Instead of adding to your accounts, you may begin relying on them for income. Decisions about where that income comes from can affect more than your account balance. They may also influence how much of your Social Security is taxable, whether Medicare income-related surcharges apply, how capital gains are taxed and how long tax-deferred savings may last.

That is why a retirement income decision should rarely be evaluated by itself.

Different Accounts, Different Jobs

One way to understand retirement accounts is to picture the vehicles in a garage. Each can help move you forward, but each has a different purpose, set of rules and level of flexibility.

A workplace retirement plan

A 401(k) or similar employer plan can serve as a practical “daily driver” during your working years. It may offer convenient payroll contributions, an employer match and a selected menu of investments. The available features, expenses and distribution options vary by plan.

A traditional IRA

An IRA may offer broader investment choices and more control, but that does not mean a rollover is automatically appropriate. Before moving money from an employer plan, consider fees, services, investment options, creditor protections, access to funds and other plan-specific features.

A Roth IRA

Qualified Roth IRA distributions are generally tax-free, which can make Roth assets useful in a coordinated retirement income strategy. Roth conversions create current taxable income and may affect other income-based calculations, so the amount and timing require careful analysis.

Social Security

Social Security can provide a continuing source of retirement income, but the claiming decision is personal. Health, longevity expectations, employment, household benefits, cash-flow needs and taxes may all be relevant. There is no single claiming age that is best for everyone.

The Tax Domino Effect

A transaction that looks favorable on its own can create consequences elsewhere. Consider a Roth conversion. The converted amount is generally included in taxable income for that year. Depending on the household, the added income could also:

• cause a larger portion of Social Security benefits to become taxable;

• reduce or eliminate income-limited deductions or credits;

• move some long-term capital gains into a higher tax rate;

• increase exposure to the 3.8% Net Investment Income Tax; or

• contribute to higher Medicare Part B and Part D premiums in a later year through the income-related monthly adjustment amount, commonly called IRMAA.

This does not mean Roth conversions should be avoided. It means the analysis should extend beyond the stated federal income-tax bracket. The more useful question is often: What is the total effect of the next dollar of income across the retirement plan?

Why Social Security Timing Matters

Social Security benefits may be taxable depending on filing status and a federal income calculation that generally includes one-half of Social Security benefits plus other income and tax-exempt interest. For married couples filing jointly, up to 50% of benefits may become taxable when combined income exceeds $32,000, and up to 85% may become taxable when it exceeds $44,000. These thresholds do not mean that 85% of a benefit is paid in tax. They mean up to 85% of the benefit may be included in taxable income.

Claiming while continuing to work before full retirement age can also trigger Social Security’s earnings test. Benefits withheld under that test are not necessarily lost permanently, but the rules add another consideration to the timing decision.

The right approach depends on the household. A claiming strategy should be considered alongside expected longevity, spousal or survivor benefits, employment income, retirement account withdrawals and the potential timing of Roth conversions.

Medicare Can Be Part of the Same Equation

Higher income can increase Medicare Part B and Part D premiums through IRMAA. Medicare generally uses tax-return information from two years earlier, so a large conversion, capital gain or other income event may affect premiums later. Certain life-changing events may allow a beneficiary to request a new determination, but eligibility and documentation requirements apply.

Because tax rules, Medicare thresholds and personal circumstances can change, projections should be updated regularly rather than treated as a one-time answer.

Build a Coordinated Withdrawal Plan

A written retirement income plan can help connect decisions that are too often made separately. The plan may evaluate:

• how much income is needed from the portfolio and when;

• which accounts may fund that income;

• when Social Security may begin;

• whether partial Roth conversions warrant consideration;

• how taxes and Medicare premiums may respond; and

• how investment risk, liquidity and legacy goals fit together.

The goal is not to predict every future tax rule or market outcome. It is to make informed decisions using the information available, test reasonable scenarios and revisit the plan as life changes.

A More Intentional Retirement Conversation

Retirement planning involves more than choosing investments or selecting a Social Security date. It is the coordination of income, investments, taxes, healthcare and legacy goals. Stonebridge Wealth Systems uses its Retirement Compass Process to help clients consider those areas together and navigate to and through retirement.

If you would like to discuss how these decisions may apply to your circumstances, contact Stonebridge Wealth Systems at 866-295-5146 or visit stonebridgeiwm.com.

Sources

• IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits: https://www.irs.gov/publications/p915

• IRS, Net Investment Income Tax: https://www.irs.gov/individuals/net-investment-income-tax

• Social Security Administration, Medicare Premiums: https://www.ssa.gov/benefits/medicare/medicare-premiums.html

• IRS, Enhanced Deduction for Seniors: https://www.irs.gov/newsroom/check-your-eligibility-for-the-new-enhanced-deduction-for-seniors

• Source video, Retirement Compass Radio: https://www.youtube.com/watch?v=LxLjFrJ25AI

Important Disclosures

This material is provided for informational and educational purposes only and is not intended as individualized investment, tax, legal or Social Security advice. The examples are hypothetical and are not a recommendation to take any specific action. Investing involves risk, including the possible loss of principal. Tax laws, Social Security rules and Medicare provisions are subject to change. Consult your financial advisor and qualified tax, legal and Social Security professionals regarding your individual circumstances. Stonebridge Wealth Systems does not provide legal or tax advice.