When You Should Take Social Security

Most 55-to-64-year-olds will rely on it when they retire.

Social security card in wallet
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The key point is Social Security income is not taxed in the same way as IRA income, says James Mahaney, vice president of strategic initiatives for Prudential Financial, Inc., and author of the paper, "Innovative Strategies to Help Maximize Social Security Benefits." You can reduce your taxes by choosing to collect higher Social Security income and lower IRA withdrawals when you decide your strategy for taking retirement income. To do this, claim your Social Security later. If you take IRA withdrawals first, and delay the start of your Social Security benefits, you'll take higher lifetime Social Security and lower IRA withdrawals, Mahaney says.

The combined income formula determines the taxation of Social Security. "Social Security income itself is treated on a much more favorable basis in this formula than income from a regular IRA, 401(k) or pension," Mahaney says. "As a result, many retirees will pay lower taxes in retirement by generating higher amounts of income from Social Security than from these other types of accounts."

Depending on your total income, you may not have to pay taxes on your Social Security income. However, once certain income thresholds are met — $25,000 for single people and $32,000 for married couples — up to 50 percent of every Social Security dollar you receive is taxed. If Social Security pushes your total combined income (as measured by a formula) above $34,000 for single people and $44,000 for couples, then up to 85 percent of every Social Security dollar you earn can be taxed, Mahaney says. "The thresholds were set in 1983 and are not indexed for inflation. As a result, more retirees will face the taxation of benefits and some retirees, who are not being taxed now, will be down the road," he adds.

[See: 6 Tips for Boomer Leaving Big Homes Behind.]

If you're still working: If you claim worker, spousal or survivor benefits before your full retirement age – at 66 or between 66 and 67 for most baby boomers – you are likely to be subject to the earnings test, says Mahaney. With the earnings test, if you start your Social Security benefits prior to age 66, during every year leading up to your full retirement age, $1 of your benefits will be withheld for every $2 you earn above the limit for that year, which is $15,480 for 2014, Mahaney says. During the year you reach your full retirement age – 66 for those born between 1943 and 1954 – your benefits are reduced $1 for every $3 you earn above a higher limit - $41,400 – until the month you reach your full retirement age. Then, the earnings test disappears.

For those who have a variety of income sources, it's best to find a financial advisor or financial planner you can trust to help you make decisions, Lacy says. Unless you have to take your Social Security early because you can no longer work and have no other source of income, it's best to delay taking it as long as you can, she adds. "We think of Social Security as 'longevity insurance,'" Lacy says.