When most people think about Social Security, they picture a steady stream of retirement income, a predictable monthly deposit that helps cover living expenses after decades of work. But what many retirees don’t realize is that those benefits may not be as tax-efficient as they expect.
Depending on your income from other sources, up to 85% of your Social Security benefits may be subject to federal income tax. And the rules that determine when benefits become taxable were created decades ago, long before today’s retirement income levels and cost of living.
I recently recorded a Retirement Blueprint episode on this topic, exploring how taxes can reduce retirement income if you’re not careful about how your withdrawals and benefits interact. In this article, I want to expand on those ideas for readers who prefer a deeper written explanation of how these tax rules work and how they can affect your retirement strategy.
View the full transcript of this episode here.
The taxation of Social Security benefits is based on something called provisional income. This is an IRS calculation used to determine how much of your benefits become taxable. While it doesn’t appear directly on your tax return, it plays an important role in determining your final tax bill.
Provisional income generally includes:
When your provisional income crosses certain thresholds, a portion of your benefits becomes taxable.
Currently, those thresholds are:
These thresholds were established in the early 1980s and have never been indexed for inflation. As a result, more retirees fall into these tax ranges every year simply because income levels have risen over time.
To be clear, this does not mean that 85% of your Social Security is taxed at 85%. Instead, it means that up to 85% of your benefits may be included in your taxable income, which can significantly increase your overall tax bill. The impact is often greater than expected, especially for retirees who saved diligently and now rely on withdrawals from retirement accounts.
One of the biggest surprises retirees encounter is how different income sources interact with Social Security.
Imagine a couple who enters retirement with healthy savings and begins drawing income from their traditional IRA. Those withdrawals are taxed as ordinary income, but they also raise provisional income, which in turn increases how much of their Social Security benefits become taxable. This can increase overall tax exposure.
Not only are the withdrawals taxed on their own, but they can also trigger additional taxes on Social Security benefits. Financial planners often refer to this as tax stacking, where multiple income sources push retirees into higher tax exposure than expected.
In many cases, retirees don’t notice this until they see their tax return or Medicare premiums increase.
With careful planning, this impact can often be reduced. Adjusting withdrawal strategies, coordinating income sources, and managing taxable income over time can help retirees improve after-tax income.
Many retirees unintentionally fall into tax traps because they make decisions one step at a time rather than looking at the bigger picture.
Here are three of the most common mistakes.
Some retirees claim Social Security as soon as they become eligible while simultaneously withdrawing from tax-deferred retirement accounts. Because IRA withdrawals count as taxable income, they can push provisional income above the taxation thresholds quickly.
In some cases, it may be more tax-efficient to use savings or taxable accounts during the early years of retirement and delay Social Security until later. The years between retirement and the start of Social Security benefits can be an ideal time for tax planning. During this period, many retirees are temporarily in lower tax brackets because they are no longer earning wages but have not yet started required withdrawals from retirement accounts.
Strategically converting portions of a traditional IRA to a Roth IRA during this window can reduce future required minimum distributions and help control taxable income later in retirement. That can ultimately reduce the portion of Social Security benefits that becomes taxable.
Taxes aren’t the only issue affected by retirement income. Medicare premiums are also based on income levels through a system called the Income-Related Monthly Adjustment Amount (IRMAA). If your income exceeds certain thresholds, you could pay significantly higher premiums for Medicare Part B and Part D. Even small increases in taxable income can push retirees into a higher IRMAA bracket, often referred to as a “stealth tax.”
One of the key tools in retirement tax planning is withdrawal sequencing, the order in which you draw income from different accounts. Most retirees withdraw funds from whichever account is easiest or most familiar. But the sequence of withdrawals can meaningfully affect taxes.
Think of retirement savings as falling into three general categories:
Choosing which “bucket” to withdraw from first can influence provisional income and overall tax liability. For example, drawing from taxable brokerage accounts or Roth accounts in the early years of retirement may help manage provisional income relative to key thresholds, which can affect how Social Security benefits are taxed. This type of planning doesn’t require complicated strategies. It simply requires coordination.
Throughout our careers, most financial advice focuses on accumulation—earning income, saving more, and growing investments. But once retirement begins, the challenge shifts. The goal becomes managing income in a way that balances taxes, withdrawal strategies, and long-term financial stability.
Retirees who approach income planning strategically often experience fewer surprises during tax season. They understand where their income comes from, how it’s taxed, and how long it can support their lifestyle. That level of clarity can make a meaningful difference in retirement confidence. Because maximizing retirement income isn’t just about receiving the largest possible Social Security check, it’s about making sure you keep as much of that income as possible. When tax planning, investment withdrawals, and Social Security are coordinated thoughtfully, retirees often gain greater clarity and confidence in their plan.
If you would like guidance building a retirement income strategy that helps manage Social Security taxation, coordinate withdrawals, and improve long-term tax efficiency, the team at GDS Wealth Management can help you evaluate where you stand and identify planning considerations based on your situation.
GDS Wealth Management is a registered investment adviser. This material is provided for informational and educational purposes only and should not be considered personalized investment, tax, or legal advice. The discussion of Social Security, taxation, and retirement income strategies is general in nature, is based on current rules that may change, and may not apply to your individual situation. Any strategies or planning concepts referenced may not be appropriate for everyone and are not guaranteed to produce results. Actual outcomes will vary based on factors such as income, tax status, investment performance, and changes to applicable laws and regulations. Examples are hypothetical and for illustrative purposes only and do not represent the experience of any specific client. GDS Wealth Management does not provide tax or legal advice, and you should consult your tax advisor, attorney, or other qualified professionals before making any decisions. Investing involves risk, including the potential loss of principal. Past performance does not guarantee future results. Advisory services are provided pursuant to a written agreement. For additional information about GDS Wealth Management, including its services and fees, please review our Form ADV available at adviserinfo.sec.gov.