Question: Tom and Anita from Springdale: How can we lower the chances we’ll have to pay taxes on our Social Security benefits?
A: First of all, we’re glad you recognize there’s a chance your benefits will be taxable – because not everyone realizes this even though, according to the Social Security Administration, 40% of beneficiaries have to pay some amount of federal taxes.
Currently, if you’re married and filing taxes jointly, your ‘provisional income’ (adjusted gross income + non-taxable interest + half of your Social Security benefits) needs to be less than $32,000 to pay zero taxes on your benefits. If this number is between $32,000 and $44,000, you’ll pay federal taxes on up to half of your benefits; and you’ll owe taxes on up to 85% of your benefits if your provisional income exceeds $44,000. So, the key to lowering your chance of paying no taxes at all comes down to staying below that $32,000 threshold.
How can this be accomplished? Consider: Reducing your taxable income by making withdrawals from tax-deferred accounts (like IRAs) after age 59 ½ but before you begin claiming Social Security; utilizing a Roth IRA and/or Roth 401(k) since withdrawals from these accounts do not count as taxable income; and/or once you turn 70 ½, making a qualified charitable distribution (QCD) directly from an IRA to your favorite charity instead of taking a distribution and writing a check.
The Allworth Advice is that reducing your tax burden on your Social Security benefits needs to involve some sort of well-planned withdrawal strategy (the above suggestions are just a few potential options). If you’re not comfortable doing this on your own, a fiduciary financial advisor can help.
Q: Sean from Blue Ash: Is there anything wrong with not using a credit card? What if I have one, but don’t ever really use it?
A: Yes, there can be a bit of risk if you don’t use a credit card issued in your name. Specifically, your credit score could take a hit. But it depends on the length of time in which there’s no activity: If you don’t use one for a few months, there really shouldn’t be an issue; but if you’ve gone a long, extended period of time without using it, the card issuer may close the account. And this is when your credit score could be negatively impacted.
Here’s how: If you lose a credit line, your ‘credit utilization’ ratio will likely increase since your amount of available credit has decreased. For example, let’s say you have two credit cards each with $10,000 in available credit (for a total of $20,000) and you use $5,000 of that a month. Your credit utilization ratio would be 25%. But, if one of these cards is closed and your spending remains the same, your ratio is now 50%. The lower this ratio is, the better – so an increase can be detrimental. In fact, credit utilization is so important that it makes up about 30% of a FICO credit score (the most common type of credit score).
Additionally, the age of a closed account could hurt your score. If it’s one you’ve had for a long time, you’ll lose all its credit history and subsequently decrease the average age of your accounts. And, in the world of FICO scores, longer credit histories are preferred. This factor makes up about 15% of a FICO score.
Here’s the Allworth Advice: For the sake of your credit score, use your credit card on occasion. Even buying something inexpensive – like a $2 coffee – once a month will signal to the card issuer that you’re an active customer.
Every week, Allworth Financial’s Amy Wagner and Steve Sprovach answer your questions. If you, a friend or someone in your family has a money issue or problem, feel free to send those questions to yourmoney@enquirer.com.
Responses are for informational purposes only, and individuals should consider whether any general recommendation in these responses is suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional adviser of his/her choosing, including a tax adviser and/or attorney. Retirement planning services offered through Allworth Financial, an SEC Registered Investment Advisor. Securities offered through AW Securities, a Registered Broker/Dealer, member FINRA/SIPC. Call 513-469-7500 or visit allworthfinancial.com