Non-qualified annuities and the taxation of Social Security benefits

By Jason Sandos

Social Security Tax Strategy

Did you know that Social Security benefits can be taxed? According to the Social Security Administration, approximately one-third of the 52 million people who receive Social Security pay income tax on their benefits. During the 2010 fiscal year, more than $22.8 billion in taxes were collected on those benefits. Most retirees are not aware of this tax, let alone how it is calculated.

Social Security benefits become taxable when your combined provisional income exceeds $25,000 for single taxpayers and $32,000 for married/head of household.
Combined provisional income = adjusted gross income + tax exempt interest for the year + 50 percent of Social Security income. Based on your combined provisional income, up to 85 percent, of Social Security benefits can be taxable in a calendar year.

Single* Married filing jointly Percentage of benefit taxed
$25,000 or less $32,000 or less None
Over $25,000 to $34,000 Over $32,000 to $44,000 Up to 50 percent
Over $34,000 Over $44,000 50 percent to 85 percent**

Every year, more retirees are subject to this tax because the income break points used for this calculation have not been indexed to inflation for over 26 years.

By using a tax deferred annuity, a retiree can effectively reduce taxable income below the thresholds where Social Security becomes taxable. This is because interest earned in an annuity is tax deferred until withdrawn.

For Example:

Ted is a retired 64-year-old gentlemen. He collects $12,000 a year from his pension, $18,500 from Social Security, and takes an IRA distribution of $3,500 each year. Ted also has an emergency fund of $162,500 in a CD earning $6,500 annually or about 4 percent interest that is accumulating for a rainy day. By comparing Ted’s current scenario vs. the deferred scenario below, you can see the tax savings Ted could potentially realize by simply moving the CD to a tax deferred annuity.

By understanding how this tax calculation works, we as insurance and annuity representatives, may be able to help retirees realize a tax savings and a potential increase in their net spendable income.

If you are interested in using the calculators illustrated in this article or more information on this and other strategies please click on my profile.

Jason Sandos Investment Representative Capital Financial Services 1374 Shelbrooke Dr. South Jordan, UT 84095 (801) 849-0049

Securities and Investment Advice Offered Through Capital Financial Services, Inc. Broker/Dealer Investment Advisor Member FINRA/SIPC
Different types of investments and investment strategies involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment or strategy will be profitable or equal to any historical performance. Only after a complete review of applicable risks, time horizons, investment objectives and any other factors determining an investor’s investment strategy, should an investor make any investment decisions. All income benefit guarantees are provided by the insuring company and subject to their claims paying ability. It is highly recommended that all investors consult with a tax professional regarding your specific situation before considering the above mentioned investment strategy.