Retirement Advice - Reducing Taxes On Your Social Security Benefits

If you are a retiree, then you are living on a fixed income. This means that every penny you have is important. Unfortunately, even for the IRS every penny is important. That is why we see retirees whose income after retirement exceeds the limits prescribed by the IRS end up paying taxes up on their Social Security benefits.

The good news is that there are ways and means of reducing taxes on your social security benefits. Most of the steps that you will take will help you keep your income below the limits set by the IRS.

Most retirees have certificates of deposit which they just rollover on maturity. A way to reduce income and the associated taxes is taking money out of the certificates of deposit and investing it into annuity. The best would be putting the money into single premium annuity or variable annuity so that you can defer your income until the need arises.

One of the advantages of an annuity is that you only touch it when you need the money. In contrast, the money in an IRA grows tax-deferred but you have to start making withdrawals when you reach the age of 70 1/2 otherwise you are penalized. And, this withdrawal can have a tax implication.

Most retirees should invest in single premium annuity because the rate of interest is pre-determined and guaranteed. This way you will have peace of mind knowing how much money you are going to earn. The only drawback is that if the interest rate is low and the market turns around, you will be getting a lower interest rate than you would have got if you have invested in stocks. In addition, once you invest in an annuity, your money is no longer liquid.

To cope with these drawbacks, you can invest in variable annuity where you are allowed to select your investment options. You will also get an opportunity to earn more if the market performs well. But you should be prepared to earn less if the market goes down.

If you do not need money immediately, another way of reducing taxes on your social security benefits is to invest in real estate investment trusts. Dividends from a real estate investment trusts are partially tax-deferred because of depreciation pass through.

If you do not do tax planning before you retire, you will be in for a nasty surprise when you are taxed on your Social Security benefits.

About Author:

Pauline Go is a professional writer for many website like babyboomercaretaker.com. She also writes other great articles like Social Security And Government Retirement Benefits, Baby Boomers Aging Needs and Ten Most Popular Cosmetic Surgical Procedures.

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