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Should I Use IRA Funds or Social Security at Age 62?

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Folks who have retired or are preparing to retire before the Social Security Full Retirement Age (FRA) face a dilemma if they have IRA assets available. Specifically, is it better to take an income from the IRA account during the years prior to FRA (or age 70) in order to receive a larger Social Security benefit; or should you preserve IRA assets by taking the reduced Social Security benefits at age 62?

At face value, given the nature of IRA assets, it seems like the best thing to do is to preserve the IRA’s tax-deferral on those assets, even though it means that your Social Security benefit will be reduced.

If you look at the taxation of Social Security benefits though, you might discover that delaying receipt of your Social Security will provide a much more tax effective income later in life. In the tables below I’ll work through the numbers to illustrate what I’m talking about.

Example

For our example, we have an individual who has a pre-tax income requirement of $75,000 per year. The individual has significant IRA assets available. If he takes Social Security at age 62, he will receive $22,500 per year. Delaying Social Security benefits to FRA would get him $30,000; waiting until age 70 would provide a benefit of $39,600 per year. In tables below we show what the tax impact would be for using Social Security at age 62, FRA, and age 70. In each case the required income is always $75,000.

Tax table in use is from 2019, and we’re assuming the individual is single. COLAs are not included in the example.

Table 1 – taking Social Security benefit at age 62:

IRA SS Tax
62 $ 52,500 $ 22,500 $ 8,932
63 $ 52,500 $ 22,500 $ 8,932
64 $ 52,500 $ 22,500 $ 8,932
65 $ 52,500 $ 22,500 $ 8,932
66 $ 52,500 $ 22,500 $ 8,932
90 $ 52,500 $ 22,500 $ 8,932
Totals $ 1,522,500 $ 652,500 $ 259,028

Table 2 – taking Social Security benefit at age 66:

IRA SS Tax
62 $ 75,000 $ 0 $ 9,674
63 $ 75,000 $ 0 $ 9,674
64 $ 75,000 $ 0 $ 9,674
65 $ 75,000 $ 0 $ 9,674
66 $ 45,000 $ 30,000 $ 8,684
90 $ 45,000 $ 30,000 $ 8,684
Totals $ 1,425,000 $ 750,000 $ 255,808

Table 3 – taking Social Security benefit at age 70:

IRA SS Tax
62 $ 75,000 $ 0 $ 9,674
63 $ 75,000 $ 0 $ 9,674
64 $ 75,000 $ 0 $ 9,674
65 $ 75,000 $ 0 $ 9,674
66 $ 75,000 $ 0 $ 9,674
67 $ 75,000 $ 0 $ 9,674
68 $ 75,000 $ 0 $ 9,674
69 $ 75,000 $ 0 $ 9,674
70 $ 35,400 $ 39,600 $ 5,917
90 $ 35,400 $ 39,600 $ 5,917
Totals $ 1,343,400 $ 831,600 $ 201,647

The difference that you see in the tables is due to the fact that Social Security benefits are at most taxed at an 85% rate. With that in mind, the larger the portion of your required income that you can have covered by Social Security, the better. At this income level, the rate of taxable Social Security is even less, as only 85% of the amount above the $44,000 base (provisional income plus half of the Social Security benefit). This results in almost $5,000 less in taxes paid over the 29-year period illustrated by delaying to age FRA. The big benefit comes by a reduction of nearly $58,000 in taxes when you delay to age 70.

Note: at higher income levels, this differential will be less significant, but still results in a tax savings by delaying. It should also be noted that COLAs were not factored in, nor was inflation – these factors were eliminated to reduce complexity of the calculations. In addition, in calculating the tax, only the standard deduction was included.

This is to assume that the individual has the available IRA assets to allow for the early use of the funds, although in the end result, delaying to age 70 required less of a total outlay from the IRA, by nearly $180,000, in addition to the tax savings.

Hands down, this is a very significant reason to delay receiving Social Security benefits at least to FRA, and even more reason to delay to age 70. The only factor working against this strategy would be an early, untimely death, especially if the individual in question is not married. In that case the IRA assets would have been used up much more quickly than necessary, and no surviving spouse is available to carry on with the Social Security survivor benefit.

9 Comments

  1. Cary says:

    Have you seen Josh Scandlen’s book, “The Tax Bomb in Your Retirement Accounts”? You can download the pdf on his web page, http://www.heritagewealthplanning.com. After reading this book I decided to delay SS until 70 and to draw down the funds in my 403b via ROTH conversions and to bridge the gap from retirement at 67 until I start SS at 70.

    1. jblankenship says:

      No I haven’t read that book but it sounds like you’ve developed a good plan. Way to go!

  2. Theo says:

    Could you please share your views on when to start drawing SS if yourRMD is going to be bigger than living expenses?

    1. jblankenship says:

      Thanks for the suggestion! I’ll have to review and see about adding another article with this topic. This seems to be a logical extension of the topic, others have suggested this as well.

  3. Dave says:

    Without a discussion of the ACA, and the different MAGA impacts of IRA funds vs social security, this article is very incomplete. Between 62-65 this impact is CRITICAL yet you did not discuss it.

    Frankly I think you should edit it and repost. People could make a decision without thinking about Aca and it could cost them a lot of money.

    I would venture that the vast majority of people considering retiring at 62 will be dependent on ACA. THE mai exception being public sector folks.

    1. jblankenship says:

      Thanks for your input. I agree that a discussion of ACA impact would add to the article, however, that was not within the scope that I intended. I may provide a future article covering that factor.

  4. H. Ruh says:

    Many thanks! I have been grappling with the question for several weeks.

    I appreciate the significant tax savings related to waiting until 70 to draw on SS benefits. I also appreciate the significant IRA savings related to drawing on SS benefits early – it appears there would be an additional $179,100 to leave to IRA beneficiaries in that scenario. Do I read the tables correctly?

    1. jblankenship says:

      Yes that’s correct.

      Bear in mind that you’ll eventually need to take RMDs from the IRA, whether you need the income or not.

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