Social Security Issue (Q & A)

Feb 2016

   Q         Dear Rick:

I hope you can help me with a Social Security question that I have.  My situation is I’m in my mid 60s and a small business owner.  My business virtually has no value other than providing me with my salary.  My lease has another four years on it and at that time I plan to close the business.  My original strategy was to delay Social Security until I close my business.  At that point in time Social Security would basically cover all my living expenses.  I also have a Roth IRA worth about $300,000.  A few years ago when my business was bad and I didn’t take a salary for a few years, you recommended that I convert my traditional IRA into a Roth, which I did.  Virtually, I was able to convert the entire amount into a Roth with little or no tax consequences.  Thank you.  I figured at most I would have to take out $5,000 a year from my Roth to cover my expenses.  I went to one of these free seminars on Social Security and they recommended to me that I take Social Security today and put the proceeds into an annuity.  They told me the annuity would grow tax deferred and then I could start drawing down on it once I retired.  My question to you is do you think this strategy makes sense?  I am in a 28% tax bracket.



A         Dear Joel:


As far as I’m concerned, the strategy only makes sense for one person and one person only and that is the person is who is selling you the annuity.  As far as I’m concerned, from a tax standpoint and a financial standpoint, the strategy makes no sense.


First, let’s look at the tax consequence.  What they did not tell you is that your Social Security is going to be subject to tax.  In your situation, since you earn more than $34,000, eighty-five percent of your Social Security will be subject to income tax.  As you mentioned, your current bracket is 28 percent which means you will pay 28 percent tax plus state income taxes on 85 percent of your Social Security.  On the other hand, if you wait to take Social Security until you’re no longer working, your Social Security will virtually be tax free.  After all, since you’re only taxable income will be your Social Security, you will basically be in a zero percent tax bracket.  Therefore, by taking Social Security now as opposed to delaying it, you are actually increasing your taxes substantially.  It is important to keep in mind that when you make withdrawals from your Roth IRA, there are no tax consequences.  In addition, when you factor in your personal exemptions and your standard deduction, you can see that you virtually would have no income subject to tax and even if there was some taxable income, you would be at the lowest bracket, not your current 28 percent.  Therefore, by delaying your Social Security you are actually saving a substantial amount on taxes.


From a financial standpoint, the strategy also makes no sense.  By delaying Social Security until the time that you sell your business, you’re earning basically eight percent on your earnings.  On the other hand, by putting the money into the annuity you’re only going to earn about one percent.  Therefore, from a pure financial standpoint, once again, this strategy makes no sense.  After all, what would you rather earn, one percent or eight percent?


When it comes to collecting Social Security, it is important that you have a strategy.  Social Security is a valuable asset and there’s no one strategy that fits everyone.  It is important to look at your individual situation before you make a decision.  Particularly, when it comes to husband and wife, it is even more important that they have a strategy between the two of them to collect Social Security.


With regard to going to seminars, I always caution people to be careful.  It’s not that I’m against seminars because after all, I have done hundreds and hundreds of seminars  throughout my career  However, I do caution people when attending seminars where the goal is to sell you something  Many of these seminars are high pressured and my philosophy is why put yourself in that uncomfortable position.  All the seminars I give, whether they’re at public libraries or through an organization, are always free and meant to educate someone, not to try to sell them anything.  Therefore, people should be cautious about going to seminars where the main goal is not to do what’s good for you but rather, to enhance the pockets of salespeople who can care less what’s good for you.


Good luck!





Rick is a fee-only financial advisor.  His website is  If you would like Rick to respond to your questions, please email Rick at