Most people already know that waiting to receive their Social Security benefitsresults in a larger monthly benefit payment. This delayed retirement approachcan increase benefits by up to 8% per year between full retirement age (FRA) andage 70, depending on your birth year and when you claim. In many cases, delayingfrom FRA to age 70 can result in a roughly 24% to 32% higher benefit.
But the hidden advantage here isn’t the larger check. While that’s certainlynice, retirees also have the chance to capitalize on the low-income gap yearsbefore the benefits start. These years create room to make the rightmoves and stretch benefits further when you do take them.
Find Out: 14 moves seniors could benefit from but often forget about.
How delaying Social Security works
Full retirement age is the age when you qualify for 100% of your primary benefitamount, usually between 66 and 67. Claiming before this time permanently reducesthe benefit, but delaying past this amount earns delayed retirement credits(DRCs) that boost the monthly benefit. After age 70, there’s no furtherincrease, so there’s no real benefit to waiting past this time.
The tables on the Social Security website give concrete examples of this;choose your birth year, such as 1957, to compare benefit amounts under differentretirement ages.
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What the gap years do for your retirement
Those years between when someone stops full-time work and when they collectSocial Security benefits are often called the “gap years.” They tend to be oneof the lowest-income periods of someone’s adult life, since regular wages maystop and Social Security hasn’t started. Withdrawals from savings can also bedialed up or down.
Tax brackets are applied annually, so these low-income years create room torecognize more income at relatively low marginal rates. Smart moves during thistime period can permanently reshape how much the IRS and Medicare collect fromyou in later retirement.
Use the window for Roth conversions
One of these smart moves is to move money from a pre-tax account, like atraditional IRA, into a Roth account. Yes, you’ll pay tax now, but your gapyears’ income may be low enough that you can do this while staying in arelatively low tax bracket. Later in retirement, when you take withdrawals fromthe Roth, the taxes will have already been paid, and you will benefit from tax-freestatus if certain rules are met.
You can essentially “fill up” lower tax brackets with Roth conversions, payingtax at a possibly lower rate than when you have to take required minimumdistributions (RMDs). This strategy may save you tax money in the long run, butit also gives you more control over how you’re taxed.
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Manage IRMAA and Medicare premium surprises
The Income-Related Monthly Adjustment Amount (IRMAA) is the surcharge added to asenior’s Medicare Part B and Part D premiums after income exceeds certainthresholds. It kicks in based on the modified adjusted gross income (MAGI) fromprevious years’ tax returns.
However, delaying Social Security can help, because the gap years give retireesa chance to plan Roth conversions and capital gains to stay below those IRMAAtiers and still take advantage of low brackets. It’s a win-win that makes thesegap years so valuable. Because once Social Security benefits and RMDs begin,MAGI almost always goes up. At that point, it’s rather difficult to avoid IRMAA.
Reduce future Social Security taxation
Depending on provisional income, an amount that includes half of Social Securityplus other income like wages, pension, and IRA withdrawals, up to 85% of SocialSecurity benefits can be taxable. Higher pre-tax withdrawals or RMDs later inretirement can push more of a Social Security payment into this taxable bucket.
But converting pre-tax assets to Roth during those gap years essentially reducesthe size of future RMDs and taxable withdrawals, so provisional income may belower. It could potentially reduce how much of your Social Security gets taxedeach year later on. The hidden gap year advantage gives you time to reshape yourfuture income mix to better manage your tax exposure.
Bottom line
Delaying Social Security gives you an 8%-per-year benefit increase, but that’snot the whole story. You can also take advantage of the hidden advantage foundin the pre-benefit gap years. Use this time to lower lifetime taxes, manageIRMAA, and reshape retirement income. Taken together, delaying and smartgap-year tax planning can give your nest egg a meaningful boost.
If you’re unsure how much to move where (and when), sketch out a gap-year taxplan before you file for benefits, or between 5-10 years ahead of retirement.Map out expected income by year, plan targeted Roth conversions, and model IRMAAthresholds and projected RMDs.
Use these numbers to see the value of delayed senior benefitsin clear terms, and schedule a meeting with a financial advisor if you’re unsurehow to maximize your timeline for the best tax results.
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