Due to the standard deduction and personal exemptions, every taxpayer has an amount of income they can receive at no taxation. The first tax bracket above the tax-free amount is just 10% but it doesn’t take a huge amount of taxable income to increase taxes more than one would expect.
Q.: Dan, I turn 63 next month. I have been on Social Security Disability since 53 or 10 years. It’s my only source of income. I currently get $2,131 monthly or $26,000 annually. I just received a lump sum check of my pension plan which is $183,000, made out to me and my IRA provider. I want $50,000 cash so I can purchase a home with the remaining $133,000 to go into my IRA. How much will I have to pay in taxes?
Secondly, I would like to attempt to go back to work for four years. It’s my understanding that I can continue to receive my Social Security Disability and reenter the workforce for up to four years. I will then be 67. Full retirement age is 66 in regards to Social Security. Is this advisable?
A: Greg, once you deposit the $183,000 into the IRA, you can take a distribution. I’m sure you expect the $50,000 to be taxable but the taxes caused will be higher than you may think.
Currently, since the $26,000 from Social Security is your sole income, none of it is taxable. In your case, as soon as the total of taxable income from the IRA and half your Social Security exceeds $25,000, part of your Social Security payments become taxable. As the total "combined income" exceeds $34,000, up to 85% of the Social Security payments become taxable. A $50,000 taxable IRA distribution creates $72,100 of gross income ($50,000 + 85% of $26,000).
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Take your gross income of $72,100 and subtract your deductions and exemptions to get your taxable income. If your 2017 taxable income exceeds $37,950, your tax bill will be $5,226 plus 25% of taxable income over $37,950.
Social Security has a strict definition of disability. Generally, returning to work prior to full retirement age will make you ineligible but there are exceptions so you should probably consult an attorney who is well versed in Social Security Disability matters. At your full retirement age, your benefits are automatically converted to your retirement benefit so the disability eligibility issue becomes moot.
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Dan Moisand’s comments are for informational purposes only and are not a substitute for personalized advice. Consult your advisor about what is best for you. Some questions are edited for brevity.
If you have a question for Dan, please email him at: RetireQA@marketwatch.com