You have several choices when it comes to retirement accounts. If your employer offers a workplace 401(k) and makes matching contributions, you should always contribute the amount necessary to get your full match before you do anything else. HR can help you do that.
But after you’ve maxed out your match and claimed all the free money your employer has on offer, you may want to consider putting additional funds into a Roth IRA. There are many benefits to a Roth opened at a brokerage firm, but one little-known advantage has to do with how your Social Security could be impacted by your decision to invest in one.
This surprising benefit could be reason enough to invest in a Roth IRA
Roth IRAs work differently from traditional 401(k) and IRA accounts. You don’t get to deduct any contribution that you make to this account from your taxes, so your taxable income doesn’t go down in the year you make the contribution. However, once you get to retirement, as long as you’ve followed some basic guidelines, you get to take your Roth IRA money out and spend it without being taxed on it.
You probably already know that if you’re thinking about investing in a Roth. But what some people don’t know is that there’s another benefit to a Roth. It has to do with whether your Social Security benefits are going to be taxed or not.
Social Security retirement benefits were not taxed at all for a long time, but that changed in 1984 when the program was amended to try to shore up its finances. One change was that benefits became partly taxable if your countable income is above a certain threshold. The table below shows when you might get stuck paying taxes on benefits.
| If you file as: | And your countable income is | This percentage of your benefits could be taxed |
|---|---|---|
| Single individual | Between $25,000 and $34,000 | Up to 50% |
| Married, filing jointly | Between $32,000 and $44,000 | Up to 50% |
| Single individual | More than $34,000 | Up to 85% |
| Married, filing jointly | More than $44,000 | Up to 85% |
Data source: Social Security Administration
You’ll notice that the term “countable” income is used, though. And that’s where the Roth IRA benefit comes in. See, countable income is half your Social Security, all taxable income, and limited types of non-taxable income (such as MUNI bond interest). Because Roth IRA distributions aren’t taxable, they aren’t part of your countable income at all.
This is a huge benefit for those with money in a Roth IRA. You can take as much money out of this account as a senior as you want to in order to provide yourself with money to live on, and you won’t have to worry that doing so will cause you to suddenly start owing taxes on Social Security.
Should you open a Roth IRA to avoid Social Security taxes?
Currently, around half of all households that receive Social Security retirement benefits could be taxed on them, according to the Senior Citizens League. And that number is only growing because the thresholds at which benefits become taxable are not indexed to inflation. That means they don’t go up over time, even as incomes naturally increase over time.
As a result, there’s a very good chance you could potentially have to give the government a cut of your retirement checks. If you don’t want to do that, opening a Roth IRA to avoid the risk of Social Security taxes could be a great move. Just remember to max out your 401(k) match first, because passing up free matching funds is never worth it.
