You would think that after years of hard work and saving, you would be free from Uncle Sam's greedy fingers once you reach retirement. Most of us know, however, that's far from the truth. The second you take out money from a traditional IRA or 401(k), it'll be taxed, and if any of your savings build interest, you'll have to pay up on that as well.
What's surprising to many people, though, is the fact that Social Security benefits are taxable as well. It seems a bit insane: The government takes money from you with the promise of paying it back later only to take it away again? When calculating an individual's tax liability, the Internal Revenue Service takes all sources of income into account including Social Security benefits.
If all of your income plus half of your annual Social Security benefit exceeds $25,000 ($32,000 for married couples filing jointly), anywhere between 50 and 85 percent of your Social Security funds will be taxed.
In an interview with Bankrate.com, Bentley University professor Steve Weisman advised anyone considering a Roth IRA conversion to do it before they start collecting Social Security.
"A lot of people considering converting a traditional [individual retirement account] into a Roth IRA should be aware that if they do that, they will end up paying income tax on the conversion, which will also be included for determining whether Social Security benefits are taxable," Weisman told the source.
Social Security isn't what is was a decades ago, and few people will be able to retire comfortably with these meager benefits. Researching alternative wealth preservation tools can help you keep up your standard of living once you leave the workforce.