© 2020 Arizent. All rights reserved.

Will clients pay taxes on Social Security?

Register now

Our daily roundup of retirement news your clients may be thinking about.

Will clients pay taxes on Social Security benefits?
Many Americans believe that Social Security is untaxed, and up until the early 1980s, it wasn’t. But reform efforts in those days implemented a tax in some situations. At most, retired clients will see 85% of their Social Security benefits subject to the tax, depending on their filing status and combined income, according to this article on personal finance website Motley Fool. The key is a taxpayer’s modified income. To calculate that number, first take any outside income other than Social Security benefits, including work income, interest, dividends, and taxable gains from investments, municipal bond interest and other income sources such as taxable pensions or rental income. Once that’s tallied, add half the Social Security benefits for the year. The final number you get determines whether or not you'll have to deal with including some of your benefits as taxable income. Retirees may owe taxes on as much as 85% of their Social Security benefits.

Is it prudent for investors to use target-date funds for retirement savings?
Target-date funds are becoming a popular investment option in retirement plans, with many employers making TDFs the default investment in their plans, according to this article on The Wall Street Journal. However, experts are split about the efficacy of TDFs in retirement investing. An analyst argues for TDFs, saying that these options help investors overcome behavioral biases, while another expert contends that clients holding TDFs in their 401(k) plan are likely to outlive their savings.

Retirees: The penalty for missing this April 1 deadline is no joke
Retirees aged 70 1/2 and older should ensure that they take the required minimum distribution from their 401(k) and other tax-deferred accounts before the April 1 deadline, according to this article on CNBC. Since the deadline falls on Saturday, clients should withdraw the mandatory distribution by March 31. Those who fail to take the RMD would get a penalty equivalent to 50% of the distribution amount.

12 reasons to contribute to a Roth IRA by April 18
Clients have until April 18 to contribute to a Roth IRA and count the savings toward their 2016 contributions, and there are many reasons to do, according to this article on Forbes. Roth IRA contributions will not affect their tax returns, and they can tap their savings in case of emergencies. A Roth IRA may also offer more investment options than an employer-sponsored plan, and investors can withdraw their savings tax-free to buy a house and cover qualified education expenses. Also, Roth IRA also offers tax-exempt growth on savings and withdrawals are not subject to taxes in retirement.

For reprint and licensing requests for this article, click here.