How Working Affects Retirement Benefits

Getting to know the rules on work and Social Security may save you a bundle for your golden years.

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But James Mahaney and Peter Carlson of the University of Pennsylvania's Pension Research Council say you can reduce taxes by spending down your IRA instead of claiming Social Security early. For example, a retired married couple both age 72 who receive $24,000 annually in Social Security benefits and $45,000 of IRA income would have an adjusted gross income of $62,050. If a similar couple were to delay taking Social Security and spend down their IRA assets during the "bridge period" between when they retire and when they sign up for Social Security, they would receive $39,000 worth of Social Security but a lower IRA income of $30,000. Although they would take in $69,000, just like the first couple, their adjusted gross income would be far lower, only $40,675. The first couple would pay $3,206 more in federal taxes.

"Many retirees will pay slightly higher taxes during the bridge period, but experience thousands of dollars in annual savings from the point that higher Social Security income begins," Mahaney and Carlson say in a working paper. "By decoupling when to take the majority of IRA income from the time one takes the majority of their Social Security income, much greater tax efficiency can be achieved."