Most people think their social security income is tax free. This is true for some people. However if you have substantial amount of income from other sources to support your retirment needs, then your social secruity income may become taxable. Therefore, planning ahead is definitely recommended.
Tax calculation is based on your "Total Income" as calculated below: Total Income = Your Adjusted Gross Income* + Non-taxable Interest + Half of your Social Security Income Adjusted Gross Income AGI = All your taxable incomes - allowable adjustments (generally speaking, personal exemptions and itemize/standard deduction)
| Single | Married File Jointly | |
| Not taxable | <$25,000 | <$32,000 |
| Up to 50% of SSI Taxable | >$25,000 and <$34,000 | >$32,000 and <$44,000 |
| Up to 85% of SSI Taxable | >$34,000 | >$44,000 |
You will never have to pay tax on 100% of your SSI, the maximum is 85%. For more info, visit IRS website. Example: Retiree Joe, receives $1,300 a month (about national average) in SSI. or $15,600 annually. For simplicity, let's say he also has $14,400 from Traditional IRA distribution. This would make his actual income $30, 000. But "total income" as the formula shown above is: $14,400+$7,800=$22,200. His social security income is not taxable. With rising cost of healthcare and living cost in general, $30,000/yr may not be enough, in which case, Joe could withdraw more from his IRA distribution, or better yet, a Roth IRA (I wrote about it here)will really help, as there's no tax impact with Roth IRA distribution. This is precisely why diversified retirement income is valuable, and should be planned ahead!