FEDweek

Social Security Shelter

Buying an immediate annuity may help reduce the tax on your Social Security retirement benefits, which you’ll probably begin receiving while you’re in your 60s. Up to 85 percent of your benefits will be taxed if your income is over certain levels. (Income from municipal bonds and municipal bond funds counts for this purpose.)

If you buy an immediate annuity, only a portion of each payment will be taxable and only the taxable portion will count. You might owe tax on only 50 percent of your Social Security benefits, or even zero tax, if you can hold down your other income. If you do choose this immediate annuity strategy you should shop around for the best deal because different insurers will offer different payouts.

You may want to buy an immediate annuity that’s fully paid out by the time you turn age 70-1/2. At that point, you’ll be required to take distributions from your IRA (unless you’ve converted to a Roth IRA) and you’ll be receiving Social Security benefits.

If you’re married, your spouse probably will be receiving Social Security benefits, too. Once you reach that age, you might consider shifting some assets into a lifetime annuity, to help assure you never run short of income, no matter how long you live.