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How Does Investment Income Affect My Social Security Benefits?

April 05, 2022

Once you have retired, company paychecks stop and sources of guaranteed income kick in. Social Security benefits are available to Americans beginning at age 62, but many people have other sources of guaranteed income from their investments to supplement Social Security benefits.

If you’re wondering how exactly to manage your investment income and Social Security benefits, sitting down with a local fiduciary financial advisor can help you to ascertain exactly how your personal assets will best work for you in retirement.

Please note, this article is for informational purposes only, there is no replacement for professional advice. It’s important to consult with a trusted, fiduciary financial advisor before modifying your investment strategies.

The Social Security Administration conducts an earnings test that only applies to earned income, such as your wages from a full or part-time job or the profits from a small business you operate. Investment income, capital gains, pension income, and income from any annuities do not count against you when it comes to the earnings test. So, the good news is that whether your investments are paying you $1,000 or $1 million per month, your Social Security benefits will not be reduced. If you do not have income from a job or business, your Social Security benefits will not be reduced, either.

If you had money withheld from your paychecks for Social Security or FICA during your working years, then your wages will be covered by Social Security. Those increments were being paid into the government’s Social Security system to protect you and other Americans for retirement, disability, survivors, and Medicare benefits. While some people invest enough to retire solely on dividends, the majority of people rely on a mix of income sources.

The earnings test applies to individuals who claim benefits before full retirement age. People may claim benefits as early as age 62. Currently, the full retirement age for anyone born between 1943 and 1954 is age 66. Full retirement age increases for anyone born between 1955 and 1960 to age 67. Those born in 1960 or later may receive full retirement benefits at 67 years of age as well.

The longer a person waits to begin receiving Social Security benefits, the higher their monthly income will be, up to age 70. If you wait until age 70 to start receiving Social Security, your benefits will increase due to earning “delayed retirement credits.”

Dividends and capital gains can affect your ultimate net Social Security benefits when taxes are factored in. Up to 85% of Social Security benefits are taxable at the federal level, based on your combined income. Combined income is determined using your adjusted gross income (AGI) plus nontaxable interest, plus half of your Social Security benefits. AGI is your total income with deductions and specific expenses subtracted.

Capital gains and dividends are included in your AGI total no matter how they are classified. Even though long-term capital gains, short-term capital gains, ordinary dividends, and qualified dividends can be taxed at separate rates, they are all treated equally for AGI.

As such, your investment income can affect the net Social Security payments you receive by potentially raising the amount of your benefits that are taxable at the federal level. Qualified dividends are taxed at the long-term capital gains tax rate, which is lower than the marginal income tax rate thus, adding some appeal for investors.

Colorado is one of 13 states that taxes Social Security benefits. As a Fiduciary, and top Registered Investment Advisor in the Denver area, our primary focus is to help people plan for every aspect of their financial life. We can guide you through how your benefits will be taxed and what AGI limits are essential to bear in mind, no matter what state you call home. You can feel confident knowing our team is here to assist you throughout all the ebbs and flows of your investment journey.

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Our top fiduciary financial advisors will help you to attain the answers you need to make confident and well-informed decisions about your individual investments and your financial portfolio as a whole. At Triumph Capital, we believe in the importance of curating specialized plans to fit each of our clients’ distinctive lifestyle and goals.

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