Social Security Increase

The good news is that your social security payments will increase by a record amount next year. The bad news: your tax bill may also rise with it!

The cost of living adjustment (COLA) should increase retirees payments by 8.7% which will help alleviate some of the cost of inflation. Unfortunately, more retirees will owe taxes on Social Security benefits. Higher income means higher taxes but don't fret there are ways designed to plan for the tax increase and to help keep more of your retirement income next year.

Here are some tips to discuss with your tax or financial advisor to prepare for these changes in 2023 and lower your income. First, minimize taxable traditional 401(k) or IRA withdrawals, as these are taxed as ordinary income, corresponding to your marginal tax bracket, but be sure to still withdraw enough to meet any required minimum distributions. Next, consider qualified withdrawals from a Roth IRA, a Roth 401(k), or a health savings account (HSA), which would not be subject to federal income tax and wouldn't have an impact on how your Social Security benefit is taxed. (Note: Roth IRA distributions of earnings must meet the 5-year aging requirement to be tax-free, and HSA withdrawals are only tax-free when used to pay for qualified health expenses.) Finally, withdrawals from a brokerage account, where long-term capital gains are taxed at a lower capital gains tax rate, generally between 0% and 20%, if you held the investments over a year. Figuring out withdrawals from retirement and brokerage accounts can be complicated, so it may help to work with an advisor.

Further, while claiming your social security as soon as possible is tempting, it is still best to wait until your full retirement age of 67. Plus each year you delay until 70, increases your benefits 8%. 

2023's cost of living adjustment can help you keep up with the higher costs. Make sure you are looking at your taxes long term and not just at this year. Whether you're planning for the next year or the next decade, managing taxes throughout retirement can be complicated. Be sure to work with a tax professional to help you understand the potential tax impacts of any planning decisions. Reach out to us for guidance and a referral at Brien@traditionswealthadvisors.com or 979-694-9100.