Social Security payments serve as a crucial income stream for numerous retirees in the U.S. Nonetheless, taxes on these benefits may apply based on your place of residence and income status. By the year 2025, nine states are set to impose taxes on Social Security benefits.
Among the states expected to tax these benefits in 2025 are Connecticut, Rhode Island, and West Virginia. Each state has its own specifications regarding rules and income limits. For instance, Connecticut allows an exemption from taxation unless your adjusted gross income (AGI) surpasses $75,000 for individuals or $100,000 for those filing jointly.
If you reside in one of the states where Social Security benefits will be taxed and anticipate a tax liability, there are ways to potentially reduce or eliminate this burden. A suggested method is to consider a Roth conversion. Withdrawals from traditional retirement accounts such as 401(k)s and IRAs are factored in when assessing whether your benefits are taxable, whereas distributions from a Roth IRA are not.
Transitioning traditional retirement accounts into a Roth IRA can be advantageous, but it’s crucial to understand that it constitutes a taxable event, and the full advantages won’t be realized until at least five years post-conversion. Timing your withdrawals strategically may also be beneficial.
Ways to lessen Social Security tax impacts
By maintaining your income beneath the taxable threshold, you can avoid taxes on your Social Security benefits. This might involve postponing your Social Security claim and drawing more from your savings earlier in retirement. Accessing investment accounts sooner can allow you to stay under the income limit later.
Waiting to claim Social Security benefits until you turn 70 can also boost your monthly income, offering a greater retirement fund down the line. This can help compensate for reduced withdrawals from your investments when necessary. Additionally, increasing your charitable contributions can lower your income and help you remain below the exemption limit.
If you are aged 70-and-a-half or older, you might have the option to give your Required Minimum Distribution (RMD) straight to a charity, adhering to specific limits and criteria. By looking into these alternatives, you could significantly lessen or even wipe out state taxes on your Social Security benefits. While moving to one of the 41 states that do not tax these benefits is an option, it should not be the only factor guiding your retirement location decision.
It’s essential to seek guidance from a financial or tax professional for tailored advice based on your individual circumstances. They can assist you in determining a safe withdrawal strategy and the best tax methods to optimize your retirement income and lessen your tax responsibilities.
