Tax Wise Spend Down

Let’s look at spending down your retirement account in conjunction with receiving social security payments. Receiving both is not tax efficient. In order to see the tax inefficiency, we must stand back and focus on two points. Point number 1 not every social security dollar received is subject to income tax. Point number 2 is every dollar received from a retirement account is subject to income tax.  Additionally, between the ages of 62 and age 70, every year social security is delayed means an additional 8% in annual benefits.

Let’s look at an example to illustrate the points made so far.

Source for this illustration-Prudential Insurance Company, as shown in the Jeff Opdyke/Wall Street Journal book entitled “Protecting Your Parents’ Money”

Tax rate assumption = 25%

Description Amount Description Amount
IRA/ Other retirement account money withdrawn and includable in taxable income


Money from Social Security income only


Money from social security added to money withdrawn from IRA/Other retirement account




Taxable income (simplified for illustration purposes, see the key assumption discussed next).




Assumption-the combined income which is the income from earnings other than social security when added to ½ of the social security income exceeds either $44,000 for a married couple or $34,000 for an unmarried individual. Combined income is tax terminology not a social security administration definition.   Assumption- the taxpayers depleted of their IRA/Other Retirement accounts. There is no taxable income from this source.  
Tax on IRA/Other retirement income at a 25% rate $ .25  


Tax on social security income computed on at most, 85% of social security income

$ .2125


$ .2125


Total tax

$ .4625


$ .2125

The illustration above boils down to a comfort level of spending down IRA/retirement account balances and letting the social security benefits rise 8% per year from age 62 to age 70, and then benefitting from an automatic cost of living adjustment “COLA” tied to inflation for every year until death.  There is an extra kicker to this approach which benefits surviving spouses. Surviving spouses receive a social security benefit equal to the deceased workers benefit for as long as they live. By waiting to age 70 the working spouse entitled to social security benefits provides extra benefits to their surviving spouse as well.

Most taxpayers would hesitate to deplete their IRA/Retirement account assets in their entirety, a perfectly rationale approach. However, the illustration points out the tax cost of taking both retirement plan distributions and social security at the same time.

Another consideration is converting IRA / Other retirement plan assets to a Roth IRA. Most financial advisors would not suggest paying tax prematurely. Leaving oneself with a lesser retirement asset base is normally not prudent. But with the conversion comes the ability to ignore distributions from a Roth IRA when computing taxes. The result is the illustration shown above applies equally to a Roth IRA conversion because only the social security income is subject to tax.