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Social Security Matters: Ask Rusty – Can I put my Social Security in a tax-advantaged account?

by AMAC Certified Social Security Advisor Russell Gloor, Association of Mature American Citizens

Dear Rusty: I will be 62 years of age at the end of this year. Can I start drawing my Social Security at age 62 and have it directly deposited into my IRA (arm’s length), not spend it and continue to work without affecting my tax position? I will defer actually using it until a later date Signed: Curious Investor

Dear Curious Investor: Regardless of where you have your Social Security benefits deposited, if you continue to work after claiming early benefits, you’ll be subject to Social Security’s earnings test. The earnings test applies to anyone who collects benefits before they reach their full retirement age (which for you is 66 years and 8 months).

It doesn’t matter if you spend your benefits, save them, or invest them; you’ll still be subject to Social Security’s earnings limit. And, since IRS rules say that only earned income (which excludes Social Security benefits) can be deposited into an individual retirement account (IRA), it is not possible for you to direct-deposit your Social Security benefits into an IRA. In any case, even if you otherwise save your benefits for later use; you will still be subject to Social Security’s earnings limit. For 2020 the annual earnings limit is $18,240 (the limit changes annually) and if that is exceeded, Social Security will take back benefits equal to $1 for every $2 you are over the limit. The earnings limit goes up by about 2.5 times in the year you reach your full retirement age (FRA) and goes away once your FRA is attained.

Social Security gets your earnings information from the IRS when you file your income taxes, and you cannot avoid the earnings test by having the money deposited for later use. The earnings test will still apply, and they will take back some of your benefits if you exceed the limit. For information, by “take back” benefits, I mean they will notify you that they have overpaid you (due to your earnings from working) and will give you the option of either paying them back in full with a lump sum payment, or they will withhold your future benefits until they recover what you owe because you exceeded the earnings limit.

As for your “tax position” on your benefits, that will depend upon your combined income from all other sources (investments, interest, pensions, earnings, etc.), plus 50% of the SS benefits you received during the tax year, plus any non-taxable interest you may have (combined this is known as your Modified Adjusted Gross Income, or “MAGI”). If you file your income taxes as a single and your MAGI is more than $25,000 (or if you file “married-jointly and your MAGI is more than $32,000) then 50% of your SS benefits will become part of your taxable income. And filing single with a MAGI of more than $34,000 (or $44,000 if married-filing jointly), up to 85% of your Social Security benefits will become part of your taxable income (by the IRS). Once again, it doesn’t matter how you dispose of your benefit payments; they will still be taxable if you exceed the clip levels mentioned above, and you will still be subject to Social Security’s earnings test until you reach your full retirement age.

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