Delay Social Security a year and save $9,000 in tax.
Posted on February 7, 2025

My niece and her husband will be the perfect candidates to delay starting Social Security (SS) until age 70 – gaining 8% real increase in benefits for each year that they delay: they will have a MOUNTAIN of traditional IRA at age 65 that will translate to a Safe Spending Amount that is double (!) their current earnings. (SSA; See Chapter 2, Nest Egg Care.) They will easily be able to take an added amount from their traditional IRA to replace the cash they would get from Social Security. They save more than $9,000 in taxes each year that they delay: that added amount from traditional IRA that replaces SS will barely be taxed vs. at least 22% tax they’d pay when they have to distribute it later. This post describes the details.

 

== A MOUNTAIN of traditional IRA ==

 

My niece and her husband are both the same age, 48. They are WAAAAY ahead of the game. They have contributed mightily to traditional IRAs in their employer plans and to their own plans – much more than 10% of their pay that I recommend here. They’ve invested only in stock index funds.

 

They will continue at their current savings rate of 10% of income per year. (More than half that is employer contributions.) At average rates of returns for stocks over the next 17 years, they will have more than double the amount they need to have at the time of retirement – and that’s after paying for college for their two children: their calculation of their Safe Spending Amount (SSA) at age 65 will be more than double the amount of total “pay” that would make them extremely happy in retirement.

 

With the amount they have, they will cross at least one IRMAA tripwire. That could work out to an effective tax rate more than 24% on their distributions from their traditional IRAs.

 

They have a big task to convert as much traditional to Roth as they can before age 65; they can only start to do this for the amounts in their current employers’ plans after age 59½ – more than ten years from now. What they have in traditional now will double. If they convert to the top of 22% tax bracket each year starting at age 59½, they won’t convert enough. They’ll still have a mountain of traditional IRA at age 65.

 

They are perfect candidates to delay taking Social Security to get the 8% increase in benefit each year. They can easily use some of their “more than enough” (see Chapter 5, Nest Egg Care) in their traditional IRAs to replace the cash they’d otherwise get from Social Security.

 

== > $9,000 less tax each year ==

 

SS, tax brackets and the standard deduction adjust for inflation. I use the 2025 tax numbers to calculate the tax they’d pay if they distribute from their traditional IRA to replace SS.

 

I’ll assume that SS for the two of them would be $50,000 in today’ dollars at age 65. If they replace Social Security with $50,000 added disbursement from their traditional IRA, they’d be paying less than 4% total tax on the $50,000: less than $2,000. That would repeat each year they delayed until they started SS at age 70.

 

 

They will come out WAY AHEAD on the tax game with this $50,000 – and each $50,000 in the following years. They avoided tax of at least 22% when they contributed to traditional and only pay 4% now. That’s the same financial result as if they had paid 4% tax and contributed to Roth years ago. Wow!

 

The tax they pay now is far less than they would pay if they distribute that $50,000 after they start on SS. I assume that $50,000 will be distributed as incremental amounts of RMD. They’ll pay at least 22% tax when they distribute later. They gain a tax benefit of more than $9,000 each year by distributing from traditional and delaying SS.

 

 

 

Conclusion: I’ve recommended that my niece and her husband delay taking Social Security until they reach age 70. (Age 65 for them is 17 years from now; I won’t be around to see if they followed my advice!) They are ideal candidates, since they will easily have “more than enough” in traditional IRAs than they will need for their immediate spending.

 

They will pay very low tax on the amount they distribute from their traditional IRA to replace the cash they’d otherwise get from SS – about 4% tax rate. They are coming out WAAY ahead on the tax game with IRAs. They avoided paying at least 22% tax rate when they contributed and are only paying 4% now. They are saving about $9,000 in taxes they would otherwise pay when they distribute after starting SS.