Pensions & Early Social Security Benefits
Pensions are retirement plans that your employer funds for you. Your employer puts money into the pension and invests it accordingly. At retirement, you receive money from your pension plan as monthly payments or a lump sum payment. If you take your pension and an early Social Security benefit, you may end up paying tax on your Social Security benefit.
Other People Are Reading
-
Significance
-
Social Security payments may be taken at age 62. However, taking your Social Security payments this early reduces the amount of money you receive. Your Social Security payment amount is reduced over the normal retirement age benefit. A pension plan payment may make up for this difference, but there is no guarantee of this.
Warning
-
Social Security payments may be subject to income tax. One-half of your Social Security, plus all of your pension payments, are added together. The combined amount must not exceed $25,000 if you are single or $32,000 if you are married. If it does, then up to 50 percent of your Social Security payment is taxable. Anything over $34,000 and $44,000, respectively, subjects up to 85 percent of your benefits to taxation.
-
Solution
-
You may solve this tax problem by converting your pension to a Roth IRA when you are given the option for a lump sum distribution. A lump sum distribution gives you your entire pension balance, less interest on future payments. You may invest part or all of this money into a lifetime annuity to mirror the guaranteed payment benefit of the pension plan. Converting your pension to a Roth also forces you to pay income tax on your pension when you convert it. But future payments are not subject to income tax during retirement. Roth income is not factored into the calculation to determine whether or not your Social Security benefits are taxable.
Consideration
-
Consider taking your Social Security payment later on in life. The more you delay your Social Security benefit payment, the higher your Social Security income will be. Alternatively, you could convert your pension plan to a traditional IRA, defer the tax on income from your pension savings, take the Social Security payments and have just enough income to fall below the threshold for taxation of your Social Security benefits.
-
