High Net Worth Investors & Social Security

By : Jeremy Sorci | January 4, 2021

Premier Financial often answers questions about how Social Security fits into a wealth management strategy. This question is especially common for high net worth investors. Even if most of your income comes from other sources, Social Security can help you leave assets to your beneficiaries.  

 High net worth investors need to find the most effective way to integrate Social Security into their wealth management process. If your retirement is just around the corner, here’s what you should know about Social Security.

Personal Wealth Management: Don’t Take a Hit

Social Security doesn’t impose much — if any — of a tax burden on retirees that depend mostly on SS benefits. For those in higher tax brackets, however, the impact is generally much more significant. The IRS determines your tax liability based on combined or provisional income; this is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.

In 2017, if you make more than $25,000 in income (or $32,000 for joint tax filers), you’ll have to pay income tax on half of your SS benefit. If you make $34,000 or more as an individual filer (or $44,000 for joint filers), you may be taxed on up to 85 percent of your benefit. To avoid paying taxes on your benefits, the key is staying in the lowest tax bracket possible… but that’s not an option for seniors that are high net worth investors.  

Bruce Smith is a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County

For those close to a 50 percent or 85 percent income threshold, however, options may exist, such as forgoing that part-time or consulting job; if that extra time spent working just goes straight into paying more taxes, it may not be worth it.

You may also consider allocating investment income into different buckets in order to fall into a lower-income tier. For example, if you’re taking disbursements from a Roth IRA, your qualified withdrawals don’t count as income, because you paid income tax when you first made the contribution to the Roth account. Spreading your income between taxable, after-tax and tax-free accounts may help you keep more of your Social Security benefits.  

If you haven’t started taking disbursements yet, you may want to consider converting some of your tax-deferred IRA funds into a Roth. Though you’ll have to pay taxes when you convert, it may spare you from taking a hit during retirement. 

When Should You Start Collecting Social Security Benefits?

The age at which you start claiming benefits affects the amount you receive. Though this can be a difficult decision for anyone, high net worth individuals may want to consider factors such as the tax impact. Wealthy seniors may want to prolong taking SS disbursements until age 70 1/2, allowing time to reduce the balance on tax-deferred accounts. At required disbursement age, choosing to take the smallest possible minimum required distribution may keep you in that lower tax bracket. 

High net worth investors

SS benefits increase by eight percent every year you wait to collect, from retirement age until age 70. That means a larger check, well into retirement. Given that studies indicate that wealthy individuals tend to live longer — males to 88, females to over 90 — deferring until 70 can mean a larger income stream later in life. 

Wealthy married couples may also want to consider earning differentials, as well. If incomes have been mostly comparable, the lower-earning spouse may want to claim Social Security first. The higher-earning spouse should wait until they are 70 if possible. If the higher earner passes away first, the spouse can collect 100 percent of the higher earner’s SS benefit. However, this is different if one spouse made more than twice as much. In this case, the higher earner should wait until the lower earner reaches full retirement age

Social Security decisions can be complex and have a lasting impact on your retirement. To ensure you’re making fully informed decisions, speak with your trusted wealth advisor. They’ll help you determine how to best integrate Social Security into your comprehensive wealth management strategy. 

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