Still Working at 65? Here’s What to Do About Medicare and Social Security
Turning 65 is a major milestone — but if you're still working, it can also bring confusion around Medicare and Social Security. Do you need to enroll in Medicare? Will claiming Social Security now trigger an earnings penalty? The answers depend on your specific situation.
Turning 65 is a milestone that often raises questions about Medicare and Social Security. But if you’re still working — and especially if you have employer-sponsored health insurance — your decisions may not follow the traditional retirement playbook.
This guide outlines what you need to know about how continued employment affects Medicare enrollment and Social Security strategy.
Medicare: Do You Need to Enroll at 65?
You become eligible for Medicare at age 65, but whether you need to enroll right away depends on your health insurance situation.
If You Have Employer Coverage Through a Company with 20 or More Employees
You can delay Medicare Part B (medical insurance) and Part D (prescription drug coverage) without penalty.
Many people still choose to enroll in Part A (hospital insurance), which is typically premium-free, while keeping their employer plan as primary coverage.
However, if you're still contributing to a Health Savings Account (HSA), be careful — enrolling in Medicare Part A makes you ineligible to continue making HSA contributions.
Once you leave your job or lose coverage, you’ll qualify for a Special Enrollment Period and have eight months to sign up for Medicare Part B without facing late penalties.
If Your Employer Has Fewer Than 20 Employees
You generally need to enroll in Medicare Parts A and B at age 65. Medicare becomes your primary payer, and your employer plan pays secondary.
Failing to enroll can result in a gap in coverage and a permanent late enrollment penalty on your Medicare premiums.
We strongly recommend reaching out to the HR contact at your employer well in advance of your 65th birthday to fully understand what actions you need to take with regard your Medicare enrollment for both you and your spouse if they are covered by your plan as well.
Don’t Overlook Part D Requirements
If you delay enrolling in Medicare Part D, you must have “creditable” prescription drug coverage through your employer — meaning coverage that is expected to pay, on average, as much as Medicare’s standard prescription drug plan.
Be sure to confirm with your employer that your current plan meets Medicare’s creditable coverage standard to avoid future penalties.
How Social Security Fits Into the Picture
While you can claim Social Security as early as age 62, most people don’t reach their full retirement age (FRA) until age 67. While you are eligible to begin collecting your social security benefit while you are still working and prior to recaching age 67, it may make sense to delay receiving your social security benefits to avoid the earned income penalty.
If you claim before your full retirement age and your earnings exceed the annual limit ($23,400 in 2025), an earned income penalty is assessed against your benefit. For every $2 earned over the limit, $1 in benefits is withheld. These withheld benefits are not lost — your benefit is recalculated at FRA to account for months when payments were withheld.
Example:
If you earn $30,000 in 2025 before reaching FRA, you are $6,600 over the earnings limit. This would result in $3,300 of your Social Security benefits being withheld that year.
After you reach FRA, there is no reduction in benefits, no matter how much you earn.
Also by delay the receipt of your social security benefits, your benefit increase by about 6% per year between the ages of 62 and 67, and then increase by 8% per year between ages 67 and 70.
Key Action Steps at 65 If You're Still Working
Review your employer health plan: Determine whether it’s considered creditable coverage and how it coordinates with Medicare.
Decide on Medicare Part A: Enrolling may make sense, but if you're still contributing to an HSA, delay enrollment to remain eligible.
Verify Part D creditable coverage: Confirm with your employer that your prescription plan meets Medicare’s standards.
Review your Social Security strategy: Consider whether it makes sense to delay benefits to avoid earnings penalties and increase your monthly payout.
Final Thoughts
Working past age 65 can offer financial flexibility and allow you to delay drawing on Social Security, but it also comes with specific rules around Medicare and benefit eligibility. Taking the time to coordinate your health coverage, HSA contributions, and income planning now can help you avoid unnecessary penalties and make more informed decisions later.
Once you are within 5 year to retirement, it can be beneficial to work with a Certified Financial Planner to create a formal retirement plan which include reviewing what your expenses will be in retirement, social security filing strategy, Medicare coverage, distribution planning, and tax strategies leading up to your retirement date.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
Do I need to sign up for Medicare when I turn 65 if I’m still working?
If your employer has 20 or more employees and provides group health coverage, you can delay Medicare Part B and Part D without penalty. However, if your employer has fewer than 20 employees, you generally need to enroll in Medicare Parts A and B at 65, as Medicare becomes your primary insurance.
Can I keep contributing to my Health Savings Account (HSA) after enrolling in Medicare?
No. Once you enroll in any part of Medicare, including Part A, you can no longer make HSA contributions. To continue contributing, you must delay all parts of Medicare enrollment until after you stop HSA-eligible coverage.
What happens if I delay Medicare Part B & D while keeping employer coverage?
You can delay Part B & D of Medicare if your employer’s health plan is considered “creditable coverage,” meaning it’s as good as or better than Medicare’s standard plan. If your coverage isn’t creditable, you may face a permanent late enrollment penalty when you eventually sign up for Medicare Part B & D.
How does working past 65 affect Social Security benefits?
You can begin Social Security as early as age 62, but if you earn more than the annual limit before reaching full retirement age (FRA), your benefits may be temporarily reduced. After FRA, your earnings no longer affect your Social Security payments, and delayed benefits increase your monthly amount by up to 8% per year until age 70.
Should I enroll in Medicare Part A at 65 even if I’m still covered by my employer?
Many people enroll in premium-free Part A at 65 while keeping their employer plan as primary coverage. However, if you’re still contributing to an HSA, you should delay Part A enrollment to avoid losing HSA contribution eligibility.
What steps should I take as I approach age 65 while still working?
Confirm whether your employer plan is creditable coverage, decide whether to enroll in Medicare Part A, and review how your plan coordinates with Medicare. Also, evaluate your Social Security filing strategy to balance income needs, taxes, and future benefit growth.
Understanding the Order of Withdrawals In Retirement
The order in which you withdraw money in retirement can make a huge difference in how long your savings last—and how much tax you pay. In this article, we break down a smart withdrawal strategy to help retirees and pre-retirees keep more of their hard-earned money.
When entering retirement, one of the most important financial questions you’ll face is: What’s the smartest order to pull funds from my various retirement accounts? Getting this order wrong can lead to unnecessary taxes, reduced portfolio longevity, and even higher Medicare premiums.
While there’s no universal rule that fits everyone, there are strategic guidelines that can help most retirees withdraw more efficiently and keep more of what they’ve saved.
1. Use Tax-Deferred Accounts (Traditional IRA / 401(k))
For clients who have both after-tax brokerage accounts or cash reserves as well as pre-tax retirement accounts, they are often surprised to find out that there are large tax advantages to taking distributions from pre-tax retirement accounts in the early years of retirement. Since all Traditional IRA and 401(k) distributions are taxed, retirees unknowingly will fully deplete their after-tax sources before turning to their pre-tax retirement accounts.
I’ll explain why this is a mistake.
When most individuals retire, their paychecks stop, and they may, tax-wise, find themselves in low to medium tax brackets. Knowing they are in low to medium tax brackets, by not taking distributions from pre-tax retirement accounts, a retiree could be wasting those low-bracket years.
For example, Scott and Kelly just retired. Prior to retirement their combine income was $300,000. Scott and Kelly have a cash reserve of $100,000, an after tax brokerage account with $250,000, and Traditional IRA’s totaling $800,000. Since their only fixed income source in retirement is their social security benefits totaling $60,000, if they need an additional $20,000 per year to meet their annual expenses, it may make sense for them to withdrawal that money from their Traditional IRAs as opposed to their cash reserve or brokerage account.
Reason 1: For a married couple filing a joint tax return, the 12% Federal tax bracket caps out at $96,000, that is relatively low tax rate. If they need $20,000 after tax to meet their expenses, they could gross up their IRA distribution to cover the 12% Fed Tax and withdrawal $22,727 from their IRA’s and still be in the 12% Fed bracket.
Reason 2: If they don't take withdrawals from their pretax retirement accounts, those account balances will keep growing, and at age 75, Scott and Kelly will be required to take RMD’s from their pre-tax retirement account, and those RMDs could be very large pushing them into the 22% Fed tax bracket.
Reason 3: For states like New York that have state income tax, depending on the state you live in, they may provide an annual state tax exemption for a certain amount of distributions from pre-tax retirement accounts each year. In New York, the state does not tax the first $20,000 EACH YEAR withdrawn from pre-tax retirement accounts. By not taking distributions in their early years and retirement, a retiree may be wasting that annual $20,000 New York state exemption, making a larger portion of their IRA distribution subject to state tax in the future.
For client who have both pre-tax retirement accounts and after-tax brokerage accounts, it can sometimes be a blend of the two, depending on how much money they need to meet their expenses. It could be that the first $20,000 comes from their Traditional IRA to keep them in the low tax bracket, but the remainder comes from their brokerage account. It varies on a case-by-case basis.
2. After-Tax Brokerage Accounts and Cash Reserve (Brokerage)
For individuals who retire after age 59 ½, the distribution strategy usually involves a blend of pre-tax retirement account distributions and distributions from after-tax brokerage accounts. When selling holdings in a brokerage account to raise cash for distributions, retirees have to be selective as to which holdings they sell. Selling holdings that have appreciated significantly in value could trigger large capital gains, adding to their taxable income in the retirement years. But there are typically holdings that may either have minimal gains that could be sold with very little tax impact or holding that have long-term capital gains treatment taxed at a flat 15% federal rate. Since every dollar is taxed coming out of a pre-tax retirement account, having after-tax cash or a brokerage account can sometimes allow a retiree to pick their tax bracket from year to year.
There is often an exception for individuals that retire prior to age 59½ or in some cases prior to age 65. In these cases, taking withdrawals from after-tax sources may be the primary objective. For individual under the age of 59 1/2 , if distributions are taken from a Traditional IRA prior to age 59 1/2, the individual faced taxation and a 10% early withdrawal penalty.
Note: There are some exceptions for 401(k) distributions after age 55 but prior to age 59 1/2.
For individuals who retire prior to age 65 and do not have access to retiree health benefits, they frequently have to obtain their insurance coverage through the state exchange, which has income subsidies available. Meaning the less income an individual shows, the less they have to pay out of pocket for their health insurance coverage. Taking taxable distributions from pre-tax retirement accounts could potentially raise their income, forcing them to pay more for their health insurance coverage. If instead they take distributions from after-tax sources, they could potentially receive very good health insurance coverage for little to no cost.
3. Save Roth IRA Funds for Last
Roth IRAs grow tax-free and offer tax-free withdrawals in retirement. Because they don’t have RMDs and don’t increase your taxable income, Roth IRAs are ideal for later in retirement, or even as a legacy asset to pass on to heirs. To learn more about creating generational wealth with Roth Conversions, watch this video.
Keeping your Roth untouched early in retirement also gives you flexibility in higher-income years. Need to take a larger withdrawal to fund a home project or major expense? Roth distributions won’t impact your tax bracket or Medicare premiums.
4. Special Considerations
Health Savings Accounts (HSAs):
If you have a balance in an HSA, use it for qualified medical expenses tax-free. These can be especially valuable in later years as healthcare costs increase.
Social Security Timing:
Delaying Social Security can reduce taxable income in early retirement, opening the door for Roth conversions and other tax strategies.
Sequence of Return Risk:
Withdrawing from the wrong accounts during a market downturn can permanently damage your portfolio. Diversifying your income sources can reduce that risk.
5. Avoid These Common Withdrawal Mistakes
Triggering higher Medicare premiums (IRMAA): Large withdrawals can push your income over thresholds that increase Medicare Part B and D premiums.
Missing Roth Conversion Opportunities: Processing Roth conversions to take advantage of low tax brackets and reduce future RMDs.
Tapping after-tax accounts too early: Maintaining a balance in a brokerage account can provide more tax flexibility in future years, and when it comes to estate planning these asset receive a step-up in cost basis before passing to your beneficiaries.
Final Thoughts
The order you withdraw your funds in retirement can significantly affect your taxes, benefits, and long-term financial security. A smart strategy blends tax awareness, income needs, and market conditions.
Every retiree’s situation is unique and working with a financial planner who understands the coordination of retirement income can help you keep more of your wealth and make it last longer.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What is the best order to withdraw funds from retirement accounts?
The “best” withdrawal strategy truly varies from person to person. A common mistake retirees make is fully retiring and withdrawing money first from after-tax sources, then, once depleted, from pre-tax sources. Depending on the types of investment accounts someone has and their income needs, a blended approach can often be ideal.
Why might it make sense to take IRA withdrawals early in retirement?
Early retirement years often come with lower taxable income, allowing retirees to withdraw from pre-tax accounts at favorable tax rates. Doing so can reduce the size of future RMDs and help avoid being pushed into higher tax brackets later in life.
How do after-tax brokerage accounts fit into a retirement income strategy?
After-tax brokerage accounts offer flexibility since withdrawals are not fully taxable—only gains are. They can help retirees manage their tax brackets from year to year, especially when balancing withdrawals from pre-tax and Roth accounts.
When should retirees use Roth IRA funds?
Roth IRAs are typically best reserved for later in retirement because withdrawals are tax-free and don’t affect Medicare premiums or tax brackets. They also have no required minimum distributions, making them valuable for legacy or estate planning.
How can withdrawal timing affect Medicare premiums?
Large distributions from pre-tax accounts can raise your income and trigger higher Medicare Part B and D premiums through the Income-Related Monthly Adjustment Amount (IRMAA). Spreading withdrawals over multiple years or using Roth funds strategically can help avoid these surcharges.
What are common mistakes to avoid when withdrawing retirement funds?
Common pitfalls include depleting after-tax accounts too early, missing Roth conversion opportunities, or taking large taxable withdrawals that increase Medicare costs. Coordinating withdrawals with tax brackets and healthcare needs can help prevent these costly errors.
How does delaying Social Security affect retirement withdrawal strategy?
Delaying Social Security reduces taxable income in early retirement, which can open opportunities for Roth conversions or strategic IRA withdrawals. Once benefits begin, managing income sources carefully helps minimize taxes and maximize long-term income.
Should You Put Your House in a Trust or Gift It?
Your home is one of the most valuable assets you'll pass on—but how you transfer it to the next generation can have major tax, legal, and financial consequences.
For many families, the home is one of the most valuable assets they’ll pass on to the next generation. But when it comes to estate planning, simply deciding who gets the house isn’t enough. How you transfer the home, either by placing it in a trust or gifting it during your lifetime, can have significant tax and legal implications.
In this article, we’ll break down the pros and cons of each option so you can make a more informed decision.
Option 1: Putting Your Home in a Trust
A revocable living trust is one of the most common tools used in estate planning to manage the transfer of assets after death—your home included.
Benefits of Using a Revocable Trust
Avoids Probate: When a home is placed in a trust, it can pass directly to your heirs without going through the probate process, which can be lengthy and public.
Maintains Control: With a revocable trust, you still own and control the property during your lifetime. You can sell it, live in it, or remove it from the trust at any time.
Clear Instructions: You can specify exactly how and when the property should transfer, including naming successor trustees to manage it if you become incapacitated.
Step-Up in Cost Basis: Heirs who receive a home through a trust at your death typically receive a step-up in basis, meaning capital gains taxes are calculated based on the home’s value at your date of death—not what you originally paid.
Potential Drawbacks
Setup Costs: Establishing a trust requires legal work and upfront costs.
Ongoing Maintenance: You’ll need to update the trust if your wishes change and ensure the title of the home is properly retitled into the trust.
Long-Term Care Risk: Unlike an Irrevocable Trust, a Revocable Trust is not protected from a Medicaid spenddown associated with a long-term care event.
To learn more about if you should put your house in a trust, watch our video here.
Option 2: Gifting the Home During Your Lifetime
Some individuals consider transferring ownership of their home to their children or heirs while they’re still alive. This might feel like a generous or efficient move—but it can come with unintended consequences.
When Gifting May Be Appropriate
If you’re planning ahead for Medicaid eligibility and want to remove assets from your estate (with timing and rules carefully considered)
If the home has minimal appreciation and capital gains aren’t a major concern
Risks of Gifting the Home
Loss of Control: Once you gift the property, you no longer own it. You can’t sell it or use it as collateral without the new owner’s permission.
No Step-Up in Basis: The recipient inherits your original cost basis. If the home has appreciated significantly, they may face large capital gains taxes when they sell it.
Medicaid Look-Back Period: Gifting a home may disqualify you from Medicaid benefits if done within five years of applying, depending on your state’s rules.
Possible Gift Tax Reporting: While you may not owe gift tax, you must file a gift tax return if the gift exceeds the annual exclusion limit ($19,000 per person in 2025).
To learn more about gifting your house to your children, watch our video here.
Which Option Is Better?
In most cases, placing your home in a trust provides more flexibility, tax efficiency, and control over how the asset is handled both during your life and after your death. It’s especially helpful if you want to:
Avoid probate
Maintain access and control
Ensure a step-up in basis for your heirs
Provide clear transfer instructions
Gifting, on the other hand, might make sense in very specific planning scenarios—but it carries more risk and fewer tax advantages if not done carefully.
Final Thoughts
Your home is more than just a valuable asset. It’s also tied to your financial security and your family’s future. Whether you decide to put it in a trust or gift it, the key is aligning the decision with your broader estate, tax, and long-term care planning goals.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What are the benefits of putting your home in a trust?
Placing your home in a revocable living trust helps it transfer to heirs without probate, maintaining privacy and avoiding court delays. It also allows you to retain control of the property during your lifetime and ensures your heirs receive a step-up in cost basis, reducing potential capital gains taxes when they sell the home.
What are the drawbacks of using a revocable trust for your home?
Setting up a trust requires legal documentation and some upfront cost, and the trust must be maintained over time to reflect your wishes. Additionally, assets in a revocable trust are not protected from Medicaid spend-down rules in the event of long-term care needs.
What happens if I gift my home to my children while I’m alive?
When you gift your home during your lifetime, ownership transfers immediately, meaning you lose control over the property. The recipient inherits your original cost basis, which could lead to higher capital gains taxes if they sell the home in the future.
Are there tax implications when gifting a home?
Yes. While you may not owe gift tax immediately, you must file a gift tax return if the gift exceeds the annual exclusion amount ($19,000 per person in 2025). The recipient also does not receive a step-up in cost basis, which can increase future taxable gains.
How does gifting a home affect Medicaid eligibility?
Gifting a home within five years of applying for Medicaid can trigger penalties or delay eligibility. The transfer may be counted under Medicaid’s “look-back” period, so timing and state-specific rules are important to consider.
Is it better to gift my home or put it in a trust?
For most people, placing the home in a revocable trust offers more flexibility, control, and tax efficiency. Gifting may make sense only in specific situations, such as Medicaid planning, and should be done with professional guidance to avoid costly mistakes. When it comes to Medicaid planning, often setting up an Irrevocable Trust to own the primary residence can be an ideal solution to protect the house from the long-term care event, and the beneficiaries can still receive the step-up in cost basis when they inherit the house.
Don’t Gift That Stock Yet – Why Inheriting Might Be Better
Thinking about gifting your stocks to your kids or loved ones? You might want to hit pause. In this video, we break down why inheriting appreciated stock is often a far smarter move from a tax perspective.
When it comes to passing wealth to the next generation, many investors consider gifting appreciated stock during their lifetime. While the intention is generous, gifting stock prematurely can create unexpected tax consequences. In many cases, allowing your heirs to inherit the stock instead can lead to a significantly better outcome — especially from a tax perspective.
Here’s what you need to know before transferring shares.
The Key Difference: Gifting vs. Inheriting Stock
The tax treatment of appreciated stock hinges on the concept of cost basis — the original value of the stock when you acquired it.
Gifted stock: The recipient takes on your original cost basis. If they sell, they may owe capital gains tax on the full appreciation.
Inherited stock: The recipient receives a “step-up” in basis to the fair market value on the date of your death. If they sell shortly after, there may be little or no capital gain.
This example illustrates why timing matters when transferring highly appreciated assets.
When Gifting Might Still Make Sense
There are scenarios where gifting appreciated stock can be a smart move:
Low-Income Beneficiaries: If the person receiving the stock is in the 0% long-term capital gains tax bracket, they might sell the stock with no federal tax owed.
In 2025, this includes:
Single filers with taxable income under $47,025
Married couples filing jointly with taxable income under $94,050
Charitable Giving: Donating appreciated stock to a qualified charity allows you to avoid capital gains tax altogether and potentially deduct the fair market value of the donation.
Other Considerations
Timing of Sale: If your child or heir plans to sell the shares quickly, gifting may trigger a large capital gain — something they might not be prepared for.
Holding Period Requirements: Gifting doesn’t reset the holding period. If owner of the stock purchase the stock more than 12 months ago, if it’s gift to someone else and they sell it immediate, they receive long-term capital gain treatment since they get credit for the time the original owner held the securities.
State Taxes: Even if there's no federal capital gain, some states still impose capital gains taxes.
Final Checklist: Before You Gift Stock, Ask:
Has the stock appreciated significantly since I bought it?
Would the recipient likely sell the stock soon after receiving it?
Are they in a low-income tax bracket or facing large expenses?
Am I trying to reduce my estate or make a charitable contribution?
Final Thoughts
Gifting stock during your lifetime can be useful in the right situations — particularly for charitable intent or strategic gifting. But in many cases, letting your heirs inherit appreciated stock allows them to avoid a sizable capital gains tax bill.
Before gifting, consider your own goals, the recipient’s financial position, and the long-term tax impact. The best outcomes often come from a well-timed, well-informed plan.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What is the main difference between gifting and inheriting stock?
When you gift appreciated stock, the recipient assumes your original cost basis, meaning they may owe capital gains tax on all prior appreciation when they sell. In contrast, inherited stock receives a “step-up” in basis to its fair market value at the time of your death, often eliminating or greatly reducing capital gains tax if sold soon after.
When does gifting appreciated stock make sense?
Gifting may be advantageous if the recipient is in the 0% long-term capital gains tax bracket or if the stock is being donated to a qualified charity. In those cases, little to no capital gains tax may apply, and charitable donors may be able to deduct the stock’s fair market value.
How does the cost basis affect capital gains taxes on gifted stock?
The cost basis determines how much of the stock’s value is subject to capital gains tax. When stock is gifted, the recipient keeps the giver’s original basis, so highly appreciated shares can result in significant taxes when sold. Inherited shares, however, get a new basis equal to their current market value.
Are there tax benefits to donating appreciated stock to charity?
Yes. Donating appreciated stock directly to a qualified charity allows you to avoid paying capital gains tax on the appreciation and may provide a charitable deduction equal to the stock’s fair market value. This can be more tax-efficient than selling the stock and donating cash.
Do gifted stocks qualify for long-term capital gains treatment?
Yes, the recipient inherits the donor’s holding period. If the donor owned the stock for more than one year, the recipient can sell immediately and still qualify for long-term capital gains rates.
What should I consider before gifting appreciated stock?
Before gifting, assess how much the stock has appreciated, the recipient’s income level and potential tax bracket, and whether they plan to sell soon. In many cases, allowing heirs to inherit appreciated stock can result in better long-term tax outcomes due to the step-up in basis.
How to Minimize Taxes on Social Security
Many retirees are surprised to find that up to 85% of their Social Security benefits could be taxable. But with the right planning, it's possible to reduce or even eliminate those taxes.
The IRS determines how much of your Social Security is taxable using your provisional income, which includes:
Your adjusted gross income (AGI)
Plus any tax-exempt interest (such as from municipal bonds)
Plus 50% of your annual Social Security benefit
Example:
If your AGI is $20,000, you receive $5,000 in municipal bond interest, and your annual Social Security benefit is $30,000, your provisional income would be $40,000 — putting you in the 50% taxable range if you file your taxes married filing joint.
Based on this calculation, here are the income thresholds that determine how much of your benefit is taxable:
Single filers
$25,000 to $34,000 in provisional income: up to 50% of benefits may be taxable
Over $34,000: up to 85% may be taxable
Married filing jointly
$32,000 to $44,000 in provisional income: up to 50% of benefits may be taxable
Over $44,000: up to 85% may be taxable
Note: This doesn’t mean your benefits are taxed at 85%. Rather, it means up to 85% of your benefit amount is included in your taxable income and taxed at your ordinary income tax rate.
Strategies to Reduce or Eliminate Social Security Taxes
1. Delay Taking Social Security
Delaying benefits until age 70 not only increases your monthly payout, but also creates an income “gap window” where you can take advantage of other planning opportunities — such as Roth conversions — before your benefit starts impacting your tax return.
2. Draw Down Pre-Tax Assets Before Claiming
In the early years of retirement, before beginning Social Security, consider withdrawing from traditional IRAs or 401(k)s. These distributions are taxable now, but doing so may reduce your future required minimum distributions (RMDs), which in turn lowers taxable income once you begin collecting Social Security.
3. Consider Roth Conversions
Similar to item 2, Roth conversions allow you to shift money from a traditional IRA to a Roth IRA, paying tax now in order to avoid higher taxes later. By shifting money from a Traditioanl IRA to a Roth IRA prior to starting your social security benefit, it may keep you in lower tax brackets in future years especially when RMDs (requirement minimum distribution) begin at age 73 or 75. Also, once in a Roth IRA, future withdrawals are tax-free and do not count toward provisional income — helping keep more of your Social Security sheltered from taxation.
Note: Keep in mind that conversions count as income in the year they’re done — and can impact provisional income temporarily.
4. Use Qualified Charitable Distributions (QCDs)
QCDs allow individuals age 70½ or older to donate up to $100,000 per year directly from an IRA to a qualified charity. These donations count toward your RMD but are excluded from taxable income.
Clarification: The $100,000 QCD limit applies per individual IRA owner — so a married couple could potentially exclude up to $200,000 in charitable distributions if each spouse qualifies.
This is another way to reduce the size of a pre-tax retirement account balance which counts toward the RMD calculation. Also since the QCD counts toward the RMD amount it can reduce your taxable income, potentially making less of your Social Security benefit subject to taxation at the federal level.
Example: Sue is 78 and is required to take RMD from her traditional IRA of $10,000. Sue decides to process a QCD from her IRA sending $10,000 to her church. She has met the RMD requirement but the $10,000 does not represent taxable income to Sue. Sue’s provision income as a single filer is $30,000 making her Social Security benefit 50% taxable. If she did not process the QCD, that would have raised her provisional income to $40,000 making 85% of her social security benefit subject to taxation.
5. Be Cautious With Tax-Free Interest
Although interest from municipal bonds is federally tax-exempt and potentially state income tax, it is included in the provisional income calculation. If your portfolio includes significant tax-free bond income, it could unintentionally push you into the 50% or 85% taxable Social Security range.
Final Thoughts
Social Security is a cornerstone of retirement income, but managing how it’s taxed is just as important as deciding when to claim. The key to minimizing Social Security taxes is planning around when you claim benefits and where your income is coming from. Strategies like Roth conversions, QCDs, and pre-Social Security IRA withdrawals can all work together to help you keep more of your benefits.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
How does the IRS determine how much of my Social Security is taxable?
The IRS uses your “provisional income” to determine taxation, which includes your adjusted gross income (AGI), tax-exempt interest, and 50% of your annual Social Security benefits. Depending on your filing status and total provisional income, up to 50% or 85% of your Social Security benefits may be taxable.
What are the income thresholds for Social Security taxation?
For single filers, provisional income between $25,000 and $34,000 makes up to 50% of benefits taxable, and income above $34,000 makes up to 85% taxable. For married couples filing jointly, the 50% range applies between $32,000 and $44,000, with anything above $44,000 potentially making up to 85% taxable.
Does “85% taxable” mean I pay 85% tax on my benefits?
No. It means that up to 85% of your Social Security benefit is included in your taxable income and taxed at your ordinary income tax rate. You’re not taxed at 85%; rather, that portion is subject to your regular tax bracket.
How can I reduce or avoid taxes on my Social Security benefits?
You can lower taxable income by delaying Social Security, making Roth conversions before claiming benefits, or drawing down pre-tax accounts early in retirement. Using qualified charitable distributions (QCDs) from IRAs after age 70½ can also reduce taxable income and lower how much of your benefit is taxed.
How do Qualified Charitable Distributions (QCDs) affect Social Security taxation?
QCDs let you donate up to $100,000 per year directly from an IRA to a charity, satisfying required minimum distributions (RMDs) without increasing taxable income. By lowering your income, QCDs can reduce the portion of your Social Security benefits subject to tax.
Does tax-free interest from municipal bonds affect Social Security taxation?
Yes. Although municipal bond interest is exempt from federal income tax, it is included in the provisional income formula. Large amounts of tax-free interest can unintentionally increase the taxable portion of your Social Security benefits.
Does Changing Your State of Domicile Allow You To Avoid Paying Capital Gains Tax?
As individuals approach retirement, they often ask the tax question, “If I were to move to a state that has no state income tax in retirement, would it allow me to avoid having to pay capital gains tax on the sale of my investments or a rental property?” The answer depends on a few variables.
As individuals approach retirement, they will often ask the tax question, “If I were to move to a state that has no state income tax in retirement, would it allow me to avoid having to pay capital gains tax on the sale of my investments or a rental property?”. The answer depends on the following variables:
What type of asset did you sell?
When did you sell it?
What are the requirements to change domicile to another state?
Selling A Rental Property
We will start off by looking at the Rental Property sale scenario. If someone owns an investment property in New York and they plan to move to Florida the following year, would it be better to wait to sell the property until after they have officially changed their domicile to Florida to potentially avoid having to pay state income tax on the gain to New York? Or would they have to pay tax to New York either way?
Unfortunately, it is the latter of the two. If you own real estate in a state that has income tax and your property has gone up in value, you’ll have to pay tax on the gain to that state when you sell it—regardless of where you live. When someone pays tax to a state other than their state of domicile, they normally receive a credit for the tax paid to offset any tax owed to their state of domicile and avoid double taxation. But that raises the obvious question: What if the state of domicile has no income tax? What happens to the credit? Answer: it’s lost. In the example of someone domiciled in Florida—a state with no income tax—who sells a property in New York, which does have a state income tax, they would owe tax to New York on the gain. However, because Florida has no income tax, there would be nothing to offset, and the credit for taxes paid to New York is effectively lost.
Selling A Primary Residence
While selling a primary residence follows the real estate rules that we just covered, the one main difference is that there is a large gain exclusion when someone sells their primary residence, that does not apply to investment properties. The gain exclusion amounts are as follows:
Single Filer: $250,000
Married Filing Joint: $500,000
Based on these exclusion amounts, someone filing a joint tax return would have to realize a gain greater than $500,000 before they would owe any tax to the federal or state government when they sell their primary residence. Remember, it’s the gain, not the sales price. If someone purchased a house for $300,000 and sells it for $700,000, there is a $400,000 gain in the property. If they file a joint tax return, the full $400,000 is sheltered from taxation by the primary residence exclusion.
Once the gain exceeds $250,000 for a single filer or $500,000 for a joint filer, then the owner of the house would have to pay tax to the state the house is located in, regardless of their state of domicile at the time of the sale.
Selling Stocks or Investments
If someone has a large unrealized gain in their taxable brokerage account and they are considering moving to a state that has no income tax, they will ask, “If I wait to sell my stock until after I have officially changed my state of domicile, will I avoid having to pay state income tax on the realized gain?” The answer here is “Yes”. This is one of the advantages that investment holdings like stocks, bonds, ETFs, and mutual funds have over real estate investments.
For example, Jen lives in New York and purchased shares of Nvidia a few years back for $10,000, which are now worth $200,000. If she sold the shares now, she would have to pay a flat 15% long-term capital gain at the federal level, and approximately 6% ($11,400) to New York State. However, if Jen plans to move to Florida and waits to sell the Nvidia stock until after she has officially domiciled in Florida, she would still have to pay the 15% long-term capital gains tax to the Feds, but she would completely avoid having to pay tax on the gain to New York State, saving her $11,400 in taxes.
The Timing of The Sale of Stock is Key
When someone changes their state of domicile mid-year, which is most, a line in the sand is drawn from a tax standpoint. For example, if Jen moved from New York to Florida on May 15th, all investment activity between January 1st – May 14th would be taxed in New York, and all investment activity May 15th – December 31st would be taxed (essentially not taxed) in Florida. It’s for this reason that individuals who have taxable investment accounts and are planning to move to a more tax-favorable state within the next few years may be influenced as to when they decide to sell certain investments at a gain within their taxable investment portfolio.
IRA Distribution Taxation
Traditional IRA distributions are taxed at ordinary income tax rates, but the same timing principle applies; any distribution processed prior to the change in domicile would be taxed in their current state, and distributions processed after the change of domicile are taxed or, in some cases, not taxed, in their new state. If Roth conversions in retirement are part of your tax strategy, this is also one of the reasons why individuals will wait until they have become domiciled in the new state before actually processing Roth conversions.
What Are The Requirements To Change Your State of Domicile
The rules for changing your state of domicile are more complex than most people think. It’s not just “I have to be in that state for more than 6 months out of the year.” That may be one of the requirements, but there are many others. So many that we had to write a whole separate article on this topic, which can be found here:
Article: How To Change Your Residency To Another State for Tax Purposes
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
Can moving to a state with no income tax help me avoid paying capital gains tax?
It depends on your income picture and the type of assets that you own. If you live in a state now that has income tax but you pay very little state income tax, moving to a state that has no income tax will have a minimal impact. However, if you specific sources of income, such as investment income or taxable income from Roth conversions, moving from a state that has income tax to a state with no income tax can have a meaningful impact.
Do I still owe state tax on the sale of a rental property after moving?
Yes. If you sell a rental property located in a state that imposes income tax, you must pay tax to that state on the gain, regardless of where you live at the time of sale. You receive a credit on the state tax paid to apply against any state tax due in your current state, but if there is no state income tax in your current state of domicile, the credit goes unused.
How is the sale of a primary residence taxed when moving to another state?
You can exclude up to $250,000 in gains if single or $500,000 if married filing jointly when selling your primary residence, provided you meet ownership and use requirements. Any gain above these thresholds is taxable to the state where the property is located, even if you’ve moved to a no-tax state.
Can I avoid state taxes on stock sales by moving before I sell?
Yes. If you wait to sell appreciated investments such as stocks, ETFs, or mutual funds until after establishing domicile in a no-income-tax state, you can avoid state tax on the capital gains. The timing of your move and the sale determines which state has taxing authority.
How does the timing of domicile change affect investment taxation?
When you change residency mid-year, income earned before the move is taxed by your former state, while income earned after is taxed under the new state’s rules. For example, investment gains realized before moving from New York to Florida would be taxed in New York, but gains realized afterward would not be.
Are IRA withdrawals and Roth conversions affected by state residency changes?
Yes. Distributions from traditional IRAs or Roth conversions made before changing residency are taxed in your former state, while those made afterward follow the tax rules of your new domicile. This timing can be strategically used to reduce state income taxes in retirement.
What are the main requirements to change your state of domicile for tax purposes?
Changing domicile involves more than just spending six months in another state. You must establish clear intent and presence — such as changing your driver’s license, voter registration, mailing address, and location of key assets — to prove your new primary residence for tax purposes.
Non-Taxable Income in Retirement: 5 Sources You Should Know About
When it comes to retirement income, not all dollars are created equal. Some income sources are fully taxable, others partially — but a select few can be completely tax-free. And understanding the difference could mean thousands of dollars in savings each year.
When it comes to retirement income, not all dollars are treated equally. Some are fully taxable, others partially taxable, and a select few are entirely tax-free. Understanding the difference is critical to building a retirement income plan that protects your nest egg from unnecessary taxation, especially in a high-inflation, high-cost-of-living environment.
In this article, we break down five sources of non-taxable income in retirement, how they work, and how to strategically use them to lower your tax bill and preserve long-term wealth.
1. Roth IRA Withdrawals
A Roth IRA offers one of the most powerful tax benefits available to retirees — tax-free growth and qualified tax-free withdrawals.
To qualify, withdrawals must occur after age 59½ and at least five years after your first contribution or Roth conversion. If both conditions are met, all distributions (contributions and growth) are 100% tax-free.
Why it matters:
Withdrawals from pre-tax retirement accounts like Traditional IRAs and 401(k)s are taxed as ordinary income, which can push you into a higher tax bracket, increase Medicare premiums, and reduce the portion of your Social Security benefits that are tax-free. With Roth IRAs, none of those problems exist.
Planning strategy:
Many retirees choose to complete Roth conversions during low-income years (such as early retirement) to move pre-tax funds into a Roth IRA while controlling their tax rate. This allows them to create a future pool of tax-free income while reducing Required Minimum Distributions (RMDs) down the line.
2. Health Savings Account (HSA) Distributions for Medical Expenses
HSAs are the only account type that offers triple tax advantages:
Contributions are tax-deductible
Growth is tax-deferred
Withdrawals are tax-free if used for qualified medical expenses
Qualified expenses include Medicare premiums, prescriptions, dental and vision care, long-term care insurance premiums (subject to limits), and more.
Why it matters:
Healthcare is often one of the largest expenses in retirement, and using HSA funds tax-free for these costs allows retirees to preserve their other taxable accounts.
Planning strategy:
For clients who are still working and enrolled in a high-deductible health plan, the strategy may be to contribute the maximum amount to an HSA and pay current medical expenses out-of-pocket. This allows the HSA to grow and be used as a supplemental retirement account for tax-free medical reimbursements later in life.
3. Social Security (Partially Non-Taxable)
Up to 85% of Social Security benefits can be taxable at the federal level, depending on your provisional income (which includes half of your Social Security benefits, taxable income, and tax-exempt interest).
However, if a retiree has very little income other than their social security, it’s possible that they may not pay any tax on their social security benefits.
Why it matters:
Retirees who rely heavily on Roth IRA withdrawals or return of principal from brokerage accounts may be able to keep their provisional income low enough to shield some or all of their Social Security benefits from taxation.
Planning strategy:
By building a tax-efficient distribution plan in retirement, retirees can often reduce the amount of tax paid on their Social Security benefits and improve net income in retirement.
4. Municipal Bond Interest
Interest from municipal bonds is generally exempt from federal income tax. If you reside in the state where the bond was issued, that interest may also be exempt from state and local taxes.
Why it matters:
For retirees in high tax brackets, municipal bonds can provide steady, tax-advantaged income without adding to provisional income or triggering taxes on Social Security.
Planning strategy:
Retirees in high-income tax brackets may hold municipal bonds in taxable brokerage accounts, while keeping higher-yield taxable bonds inside IRAs or 401(k)s where the interest won’t be taxed annually.
5. Return of Principal from Non-Retirement Accounts
Withdrawals from taxable brokerage accounts can be structured to return your cost basis first, which is not subject to tax. Only the gains portion of a sale is subject to capital gains tax — and long-term capital gains may be taxed at 0% if your taxable income is below certain thresholds.
Why it matters:
This allows retirees to tap into their investments in a low-tax or no-tax manner — especially when drawing from principal rather than interest, dividends, or gains.
Planning strategy:
Coordinate asset sales to manage taxable gains, and consider drawing from principal early in retirement to reduce future RMDs or pay the tax liability generated by Roth conversions in lower-income years.
Final Thoughts: Build a Tax-Efficient Retirement Income Plan
Most retirees understand the importance of investment performance, but few give the same attention to tax efficiency, even though taxes can quietly erode thousands of dollars in retirement income each year.
By blending these non-taxable income sources into your withdrawal strategy, you can:
Reduce your tax liability
Lower Medicare surcharges
Improve portfolio longevity
Increase the amount of inheritance passed to the next generation
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What types of retirement income are tax-free?
Common sources of tax-free retirement income include qualified Roth IRA withdrawals, Health Savings Account (HSA) distributions for medical expenses, a portion of Social Security benefits, municipal bond interest, and the return of principal from non-retirement investments. These sources can help retirees reduce overall taxable income and extend portfolio longevity.
Why are Roth IRA withdrawals tax-free in retirement?
Roth IRA withdrawals are tax-free if you’re over age 59½ and the account has been open for at least five years. Because Roth withdrawals don’t count toward taxable income, they won’t increase your tax bracket, affect Medicare premiums, or reduce the tax-free portion of your Social Security benefits.
How can a Health Savings Account (HSA) provide tax-free income in retirement?
HSAs offer triple tax advantages: contributions are tax-deductible, growth is tax-deferred, and withdrawals are tax-free for qualified medical expenses. Retirees can use HSA funds to pay for Medicare premiums, prescriptions, and other healthcare costs without generating taxable income.
Are Social Security benefits always taxable?
No. Depending on your provisional income, up to 85% of Social Security benefits may be taxable, but some retirees owe no tax on their benefits. Keeping taxable income low through Roth withdrawals or return of principal from brokerage accounts can help reduce or eliminate Social Security taxation.
How are municipal bond earnings taxed?
Interest earned from municipal bonds is typically exempt from federal income tax and, if the bonds are issued by your home state, may also be exempt from state and local taxes. This makes municipal bonds a valuable source of tax-advantaged income for retirees in higher tax brackets.
What does “return of principal” mean for taxable accounts?
When you sell investments in a taxable brokerage account, the portion representing your original cost basis is considered a return of principal and isn’t taxed. Only the gains portion is subject to capital gains tax, which may be as low as 0% for retirees in lower income brackets.
How can retirees use non-taxable income to improve their financial plan?
Strategically blending tax-free and taxable income sources can lower your overall tax burden, reduce Medicare surcharges, and improve long-term portfolio sustainability. This approach helps preserve wealth and increase the amount that can ultimately be passed to heirs.
Understanding the $3,000 Investment Loss Annual Tax Deduction
Each year, the IRS allows a tax deduction for investment losses that can be used to offset earned income. However, it’s a use-it-or-lose-it tax deduction, meaning if you fail to realize losses in your investment accounts by December 31st, you could forfeit a valuable tax deduction.
Each year, the IRS allows a tax deduction for investment losses that can be used to offset earned income. However, it’s a use-it-or-lose-it tax deduction, meaning if you fail to realize losses in your investment accounts by December 31st, you could forfeit a valuable tax deduction. In this article, we are going to cover:
Investment loss deduction limit
Single filer versus Joint filer
Short-term vs Long-term losses offset
Carryforward loss rules
Wash sale rules
$3,000 Investment Loss Deduction
Each year, the IRS allows both single filers and joint filers to deduct $3,000 worth of investment losses against their ordinary income. Usually, this is not allowed because investment gains and losses are considered “passive income”, while W-2 income or self-employment income is considered “earned income.” In most cases, gains and losses on the passive side of the fence do not normally offset income on the earned side of the fence. This $3,000 annual deduction for investment losses is the exception to the rule.
Realized Losses In Investment Accounts
To capture the tax deduction for the investment losses, the losses have to be “realized losses,” meaning you actually sold the investment at a loss, which turned the loss from an “unrealized” loss into a “realized loss” by December 31st. In addition, the realized loss has to take place in a taxable investment account like an individual account, a joint account, or a revocable trust account. Accounts such as an IRA, 401(k), or SEP IRA are tax-deferred accounts, so they do not generate realized gains or losses.
Long-term versus Short-term Losses
The realized losses can be either short-term or long-term, or a combination of both, leading up to the $3,000 annual loss limit. But if you have the option, it’s often more beneficial from a pure tax standpoint to realize a long-term loss, and I’ll explain why.
In the investment world, short-term gains are taxed as ordinary income and long-term gains are taxed at preferential long-term capital gains rates that range from 0% - 23.8% (including the Medicare surcharge). But when you realize investment losses, long-term losses cannot offset short-term gains. Only short-term losses can offset short-term gains.
By realizing $3,000 in long-term capital losses, you can use that amount to offset $3,000 of earned income—taxed at higher ordinary income rates—rather than just offsetting long-term capital gains, which are already taxed at lower preferential rates. Potentially saving you more tax dollars.
Loss Carryforward Rules
But what if your realized losses are more than $3,000 for the year? No worries, both short-term and long-term losses are eligible for “carryforward” which means you can keep carrying forward those losses into future tax years until you have additional realized investment gains to eat up the loss, or you can continue to take the $3,000 per year investment loss deduction until your carryforward loss has been used up.
Single Filer versus Joint Filer
Whether you are a single filer or a joint filer, the total annual investment losses deduction is $3,000. It does not double because you file married filing jointly - even though technically each spouse could have their own individual brokerage account with $3,000 in realized losses. However, if you file “married filing separately,” the annual deduction is limited to $1,500.
Wash Sale Rule
When you intentionally sell investments for purposes of capturing this $3,000 annual loss deduction, you have to be careful of the 30-Day Wash Sale Rule, which states that if you sell an investment at a loss and then buy that same investment or a “substantially identical security” back within 30 days of the sale, it prevents the investor from taking deduction for the realized loss.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What is the IRS investment loss deduction limit?
The IRS allows taxpayers to deduct up to $3,000 of realized investment losses ($1,500 if married filing separately) against ordinary income each year. This deduction applies only to losses in taxable investment accounts and must be realized by December 31st to count for that tax year.
What counts as a “realized” investment loss?
A loss is realized when you sell an investment for less than its purchase price. Unrealized losses—investments that have declined in value but haven’t been sold—do not qualify for the deduction. Losses must occur in taxable accounts, not tax-deferred ones like IRAs or 401(k)s.
How do short-term and long-term losses differ for tax purposes?
Short-term losses offset short-term gains, while long-term losses offset long-term gains. However, up to $3,000 of net long-term losses can also offset ordinary income, which is taxed at higher rates. This can provide a greater tax benefit than simply offsetting lower-taxed long-term gains.
What happens if I have more than $3,000 in investment losses?
Losses that exceed the $3,000 annual limit can be carried forward indefinitely to future tax years. These carryforward losses can offset future investment gains or continue to reduce ordinary income by up to $3,000 each year until they are fully used.
Does the $3,000 investment loss deduction double for married couples?
No. The deduction limit is $3,000 per tax return, whether you file as single or married filing jointly. For those filing separately, the limit is reduced to $1,500 per person.
What is the wash sale rule and how does it affect loss deductions?
The IRS wash sale rule disallows a deduction if you sell an investment at a loss and repurchase the same or a substantially identical security within 30 days before or after the sale. To preserve the deduction, you must wait at least 31 days before buying the same investment again.
Why is it important to realize losses before year-end?
The investment loss deduction follows a “use it or lose it” rule — losses must be realized before December 31st to count for that year’s tax filing. Missing the deadline means forfeiting the potential $3,000 deduction for that tax year.
