Retirees may face unexpected tax liabilities on their Social Security benefits, with both federal and state taxes potentially impacting their income. While 42 states exempt Social Security from state taxes, federal taxation depends on a retiree’s combined income, which includes adjusted gross income and half of Social Security benefits. As inflation drives incomes higher, more retirees are likely to find themselves subject to federal taxes, a stark contrast to the less than 10% who faced this burden when taxes were first imposed in the 1980s.
One effective strategy to mitigate federal tax exposure is to invest in Roth retirement accounts. Unlike traditional retirement accounts, withdrawals from Roth IRAs and Roth 401(k)s do not count toward combined income calculations, allowing retirees to potentially lower their taxable income.
For market professionals, understanding these tax implications is crucial for advising clients on retirement planning. Encouraging the use of Roth accounts can be a key strategy to help retirees preserve their income and enhance their financial stability in retirement.
Source: fool.com