Social Security Primary: Prudential Research paper

bee

Seem like a good link to bookmark.

"Put aside what you think you know about how Social Security is taxed. Based on how the taxation of
Social Security benefits is discussed in the marketplace and the media, it is clear that this information
is not widely understood. Although the following discussion may become confusing at times, it is
being presented so that retirees and their advisors can learn about a way to lower taxes under current
law. Lower taxes should translate into higher amounts of after-tax retirement income and an improved
standard of living."

Research paper from Prudential:

http://research.prudential.com/documents/rp/InnovativeSocialSecurityNov2012.pdf

bee

From this paper:
@msf et al,
To me, it appear a math error has occurred within this research paper.

Wouldn't the tax rate be a "blended rate" of both IRA income and taxable SS income, not an "additive rate" of the two?

In this example (see image), wouldn't the tax rate fall somewhere between 25% and 21.25% and not be an "additive rate" of (46.25%)?

This was found on page 11 fig3:


along the same line of thinking this statement also seem inaccurate:

" Once a very low income threshold is
met ($34,000 for singles and $44,000 for married couples),
every dollar received from an IRA causes up to 50% of a
Social Security dollar to become taxed as well. At a second
threshold, up to 85% of a Social Security dollar will become
taxable. Assuming a 25% federal tax bracket, this creates a
marginal tax of 46.25% on IRA dollars. Applicable state taxes
may push the marginal tax rate to over 50%."

heezsafe

@bee Oh, whoopsie--- that's really sad. Someone working a half-cup short on their java?

Anna

bee, you have to put your tongue in the correct position to get the numbers. Scott Burns years ago had a whole table of IRA withdrawal and SS taxes.

Here is where they get it. You have only one additional dollar when you withdraw the $1 from the IRA. Prior to the withdrawal, you owed no taxes on your $1 of SS. So when you withdraw the IRA money, all the "new" taxes come out of the IRA money. Income increased $1 and taxes increased by .46 of that $1. (In essence, if you go above the thresholds with the withdrawal, your IRA only added 54 cents per dollar withdrawn to your after tax income.)

Or something like that.

msf

The SS formula is rather convoluted. In a sense it takes 0% of some of your MAGI (the part up to $32K for couples), 50% of a middle range of MAGI (between $32K and $44K for couples), and 85% of your MAGI above the second threshold ($44K for couples).

If that sounds strange, because I haven't said a thing about how much SS you're getting, you're right. These amounts are capped by percentages of SS (up to 85% of SS, depending on income levels). But in a middle range, SS really doesn't enter the picture. (Which is a way of saying that what you've got is a surtax, not a tax on SS, though SS limits this surtax.)

So what Anna wrote is right, especially if we ignore SS altogether, and just look at MAGI. Add an extra dollar, and this funky calculation is going to add 85c extra to your income (if your MAGI is over $44K). So the $1 of extra income shows up as an extra $1.85 in taxable income. At 25%, the tax is $0.46. That's 46% of the extra dollar.

This is the first time I've gone through the SS worksheet in detail - I had to look twice to convince myself that SS really does drop out of the calculation. In some ranges of income, it does.