9 Ways to Help Clients Reduce Taxes on Social Security

What You Need to Know

Many of your clients will find their Social Security benefits are subject to taxes.
There are a number of planning steps you and your client can take to reduce or eliminate these taxes.
Even if you can’t eliminate the taxes on their Social Security benefits, proper tax planning can help reduce your client’s overall tax burden.

Social Security is an important component of retirement income planning for most of your clients. When should they claim their benefits? What is an optimal claiming strategy for a married couple?

Retirement income planning isn’t complete without also considering taxes. Strategic tax planning can help clients reduce or avoid taxes on their Social Security benefits.

How Are Social Security Benefits Taxed?

Social security benefits can be subject to taxes as follows.

If your client files as single and their provisional income is:

between $25,000 and $34,000, they may have to pay taxes on up to 50% of their Social Security benefits.
greater than $34,000, they may have to pay taxes on up to 85% of their Social Security benefits.

If your client files as married and joint and their provisional income is:

between $32,000 and $44,000, they may have to pay taxes on up to 50% of their Social Security benefits.
greater than $44,000, they may have to pay taxes on up to 85% of their Social Security benefits.

Clients who are married and file separately will likely pay taxes on their benefits as well.

Note that provisional income is defined as:

Adjusted gross income + nontaxable interest + half of their Social Security benefits.

Planning Options to Reduce Taxes on Social Security

There are a number of planning steps you and your clients can take to try and reduce the taxes on their Social Security in retirement. By default, most of these steps fall into the category of retirement tax planning, which is important even outside the context of trying to reduce or eliminate taxes applicable to their Social Security benefits.

Here are some options to consider. The best options will vary based on your client’s individual situation.

1. Prioritize retirement income planning.

Retirement income planning is one of the most important things you do for your clients in retirement. Their withdrawal strategy should be evaluated regularly, in most cases every year, to be sure that they are withdrawing funds from their various accounts in the most tax-efficient fashion.

This is especially important once they claim their Social Security benefits. 

2. Reduce RMDs. 

With many of your retired clients, one of the larger generators of taxable income each year is their required minimum distributions from traditional IRAs, 401(k)s and other traditional retirement accounts.

For clients who have not yet reached the age when RMDs commence, the years leading up to their RMD age represent a good time to take planning steps that will reduce RMDs in the later years of retirement. Many of the additional strategies discussed will help your clients reduce RMDs. 

3. Push for Roth contributions.

Having your client make contributions to Roth accounts, including Roth IRAs and a Roth 401(k) or a Roth option in other workplace retirement plans such as a 403(b), can help them accumulate significant balances that can be tapped tax-free. Qualified Roth distributions are not counted as provisional income and will not affect the taxation of a client’s Social Security benefits.

Roth accounts provide your clients with flexibility regarding which retirement accounts to tap in a given year. Tapping Roth accounts versus traditional retirement accounts to the extent possible can help lower their taxable income in a year where their income might otherwise be a bit higher.

It’s important to ensure that the five-year rule on these accounts is satisfied so that the withdrawal meets the criteria for a qualified distribution. 

Roth IRAs are not subject to RMDs, which are often one of the major sources of taxable income for retirees. This also applies to designated Roth accounts in 401(k)s and other qualified plans beginning in 2024. 

4. Consider Roth conversions. 

Another planning strategy to consider in the years prior to claiming Social Security is doing a Roth conversion. Ideally, you can work with your client to do the conversions in years when their income might be on the low side, either during their working years or in the first few years of retirement.

Money converted to a Roth IRA will no longer be subject to RMDs, reducing their future RMDs and the taxes associated with them. Additionally, money converted to a Roth IRA can be withdrawn tax-free once the five-year rule and other requirements have been satisfied. 

5. Review QLACs.

Qualified longevity annuity contracts are deferred annuities purchased inside of a retirement plan such as a IRA or a 401(k). Due to a change made in the Setting Every Community Up for Retirement Enhancement (Secure) 2.0 Act, clients can now use up to $200,000 of their retirement account balance to purchase a QLAC. 

From a tax planning perspective, the money used for the contract premium is excluded from their RMDs until they commence receiving the annuity payments. This can be stretched out as far as age 85.