When I say twenty-five percent, what’s the first thing that comes to mind? Twenty-five percent off the purchase price in the form of a sale? How about leaving a twenty-five percent tip for great service? Maybe a twenty-five percent return on an investment you’re hoping for. Well, here’s a twenty-five percent that nobody wants. It’s the penalty that the IRS can hit you with for one simple mistake on your retirement accounts. And the worst part? It’s completely avoidable. Stick around because today I’m gonna show you exactly how to make sure you never have to pay this twenty-five percent penalty.
Welcome to today’s Providence Financial Retirement show. I’m your host, Anthony Saccaro. Thank you for taking time out of your day to join us. We are your retirement income source, and this is the place where retirees come for income. On our show today, we’re gonna take our time answering two questions about two very different but very important topics. In the first part of our show, we’re gonna talk about IRAs and retirement accounts, and we’re gonna answer a question about required minimum distributions, and we’re gonna get into some detail.
In the latter half of our show, we’re gonna spend some time talking about Social Security and answering a question there. If you have retirement accounts, then you’re gonna wanna stick around for the first part of this show, and if you have questions about Social Security, you’re also gonna wanna stay with us.
Let me kick us off with our first listener question today, and he wrote in this: “Hi, this is Marcus from Camarillo. I’m 71, and I’ve got most of my retirement savings spread across a couple of traditional IRAs and an old 401 from a job that I left years ago. I keep hearing about these required minimum distributions and that I’m supposed to start taking money out whether I need it or not. The thing is, my wife and I are doing okay right now, and we don’t really need to pull money from these accounts yet. So my question is this. What exactly do I need to know about required minimum distributions? When do they start? How do they work? What happens if I get it wrong? And is there anything smart that I should be doing now instead of just taking the money and paying the tax? I’d love for you to walk through the whole thing.”
Marcus, thank you so much for taking time to write in that question, and we’re gonna take some time in this show and answer that question and do a deep dive for you so that you and our other listeners can get some information that’s really important about this topic.
Before we go there, though, if you have a question for the show or you have a suggestion for what we might talk about in a future episode, I’m all ears. All you need to do is go to providencefinancialradio.com and you’ll be able to type in your question or comment, and they do all get read. Maybe we’ll get a chance to talk about it in the future.
If you just heard Marcus’ question, then you realize it is actually four or five questions in one, and there’s a lot there, which is why we’re gonna take some time and flesh these answers out. Required minimum distributions, they mess a lot of people up psychologically because it flips your investment narrative on its head. The lifetime message that you’re used to when you’re heading towards retirement is you save your money and you don’t ever touch it. Required minimum distributions, they’ll flip that, and they basically say that no matter what, even if you don’t need the money like Marcus, you’re now required to start making withdrawals, and it’s the opposite of what you’ve been doing for thirty-five or forty years or more, and there can be a huge discomfort in now having to start to withdraw from your portfolio.
The IRS doesn’t care whether you need the money or not. What they care about is their taxes, and the only way that they’re going to start collecting taxes on your IRA is by forcing you to make withdrawals. IRAs and 401Ks are only taxable when you make withdrawals, and if you never make a withdrawal, then they never collect their tax. That’s the reason that RMDs exist. The government wants their money. You might have been saving into your retirement accounts for decades, and every time you make a contribution, you don’t pay tax on that money. That means that the government’s been losing revenue on your contributions all these years, and they can’t keep losing revenue forever. They want their revenue, and through required minimum distributions, they’re going to force you to start making withdrawals, whether you need the money or not, whether you want the money or not.
And just to make sure that you don’t try to beat the system and just ignore the withdrawals, they attach a significant penalty to any required minimum distribution that you should have taken, but you didn’t. That penalty, that’s twenty-five percent. 25% of the amount you should have taken but didn’t. And if you correct the error quickly, they might lower it to 10%, but why would you want to pay a 10% penalty when it’s completely avoidable?
I was just having a conversation with someone the other day, and when I mentioned RMDs, they asked what that was. They were 70 years old, it was only a few years away, and they didn’t even know what a required minimum distribution was. And I’m guessing they’re not the only ones. A lot of you probably have never heard of RMDs. You might know what they are, and now that you know there’s a 25% penalty for missing one, you probably want to learn more.
If that sounds like you, I’ve got a video that you’re gonna wanna watch because it’s gonna explain required minimum distributions in plain English. It’s only seven or eight minutes, and it’s animated, so it’s fun to watch. But it’s also very powerful because you’ll learn what a required minimum distribution is and what you need to know about them, so you don’t ever have to worry about a 25% penalty for missing one.
As a listener to the Providence Financial Retirement Show, you’re entitled to get one of these videos for free. We’ll email it to you. All you have to do is request it, which you can do easily by going to providencefinancialradio.com/video. Again, it’s providencefinancialradio.com/video. Leave us your information, and we’ll email it over to you shortly, and you’ll be able to learn what you need to know to avoid the 25% penalty for missing a required minimum distribution.
To claim your free video and get it emailed right over, just go to providencefinancialradio.com/video and you’ll have it shortly.
Thank you for being with us here today. I’m Anthony Saccaro. You’re listening to the Providence Financial Retirement Show, and we’re in the middle of a good discussion about required minimum distributions, what it is you need to know to avoid the 25% penalty for missing one.
One of the first questions that we often field from people who are learning about RMDs for the first time is when do they have to take it? The answer to that question depends on when you were born. If you were born in 1960 or later, your RMD age is gonna be 75 years old. But if you were born before 1960, your required minimum distribution age is 73.
Marcus, because you’re only 71 years old, you have a couple of years until required minimum distributions kick in, and this gives you a window of opportunity to do some planning. We’re gonna talk more about what you can do before 73 in your situation. Once you turn required minimum distribution age, though, you have to start taking your distributions by December 31st of each year.
And if you wait until after that, that’s where that 25% penalty kicks in. There’s an exception, though, for the first year that you turn your RMD age. In that first year when you become subject to RMDs, you can actually wait until April 1st of the following year to take your first RMD. But every RMD thereafter has to then be taken by December 31st.
And sometimes when I explain this to someone, they automatically assume that, hey, I don’t have to take my first RMD until April 1st. I’m going to wait. And that could be a logical assumption, except for the fact that there’s a trap. If you wait until April 1st to take your required minimum distribution for that first year, you’re actually taking RMD for the previous year, and by December 31st, you have to take another RMD.
That means that even though you’re taking a required minimum distribution for two different years, because you took them both in the same year, they’re both gonna show up on the same tax return, and there could be a lot of bad things that happen as a result of that. It might kick you into a higher tax bracket. You might have to pay more taxes on Medicare Part B. It might cause more of your Social Security to be taxed, and usually it’s not a good idea. Now, there’s exceptions to that, but generally speaking, taking your RMD in the year that you’re first required to take it is usually what makes the most sense.
It’s also worth noting that required minimum distributions apply to all of your pre-tax retirement accounts, not Roth IRAs, because you’ve already paid tax on that money. Roth IRAs have no RMD requirement, but all the other types of IRAs do, whether it’s a SIMPLE IRA or a SEP IRA or 401k or 403b, they’re all subject to the required minimum distribution.
And they all have different rules, which we’ll touch on here in a few minutes as well. If you’re approaching RMD age, though, there’s a lot that you need to know. And the time to learn about them is not after you find out the hard way by paying a twenty-five percent penalty. The time to learn is now.
In my book, More Life Than Money, which is an Amazon number one bestseller in multiple categories, I spend a lot of time talking about required minimum distributions just so you can learn how they work and make sure you get the education you need to avoid that penalty we’ve been talking about.
As a listener of the Providence Financial Retirement Show, you have the ability to get one of my books absolutely free of charge. To claim your free copy, it’s really easy. All you need to do is go to our website and give us your information, and you’ll get a copy in the mail just a few days later. Go to providencefinancialradio.com/book. Again, it’s providencefinancialradio.com/book, and just request your free copy now. Really easy. Once again, that website is providencefinancialradio.com/book, and we’ll get it right out. You’ll have it in a few days, but you’ll learn what you need to know about required minimum distributions.
Thank you for joining us today, wherever life might have you. Really glad that you’re here. If you just hopped on, we’re gonna be answering two questions today, one question about required minimum distributions and IRAs, which is where we are right now, and then in a little bit, we’re gonna answer and spend a good part of our show answering a question about Social Security.
I’m Anthony Saccaro, and this is the Providence Financial Retirement Show. If you’ve been with us up to this point, then you know the reason RMDs exist is because the government’s gonna force you to start taking income out of your retirement accounts whether you want to or not. They want their tax dollars, and the only way they get their tax dollars is when you start to make withdrawals. That’s why RMDs exist. If you don’t take your required minimum distribution by the required deadline, as we’ve discussed, then you know that there’s a 25% penalty.
How much then do you have to take out of your retirement accounts in order to avoid that penalty? The answer is about 3.8% in the first year. So if you have one million dollars and you’re RMD age this first year, you’re gonna have to take out about $38,000. That’s if your RMD age is 73 years old. If your RMD age is 75, then it’s gonna be closer to 4%. It’s around $40,000 per year if you have a one million dollar balance.
It’s really a moving target, though, because every year the RMD increases by about 0.1%. So when you’re 76, you have to take roughly 4.1%. When you’re 77, you have to take roughly 4.2%, and so on. This percentage is gonna be based on the December 31st balance of the previous year. And this is a part of what causes that target to be constantly changing. Every year, your portfolio’s gonna go up or it’s gonna go down. The percentage that you have to take is gonna go up a little bit, and you’re gonna be making withdrawals. Because of all these moving parts, your RMD’s gonna change every year, and it could be higher in some years than it was previous, or it could also be lower, simply depending on how all these factors come together.
Hopefully now you have a better understanding, at least a ballpark idea, as to how much you have to take every year to avoid that steep penalty. There’s another area of required minimum distributions, though, that often trip people up, and that is where do you take your RMDs from? There’s an aggregation trap that you need to really be aware of because the rules of required minimum distributions and where to take them from depend on the type of different accounts you have.
If you have multiple IRAs, the government allows you to aggregate those and take your RMD from any one of those IRAs. Let’s say you have three different IRAs that total $500,000. And let’s just say that your RMD is $20,000. Because all of your accounts are listed as IRAs, you can take that twenty thousand dollars from any one of your accounts and you satisfy the rules.
What if you have a 401 in the mix, though? Or what if you have multiple 401s? Can you aggregate for those accounts? Well, the answer is no, it doesn’t work. If you have multiple 401s, you have to take a minimum distribution from each 401. And you also cannot take a minimum distribution from an IRA to satisfy an RMD from a 401. They have to be taken from the right accounts.
If you’re a teacher or you work for a hospital or some type of nonprofit, then you might have a 403. And the aggregation rules apply for 403s as well, meaning that if you have multiple 403s, you can take an RMD from any one of your 403s to satisfy the RMD for all of your 403s. But you can never cross-aggregate. You can never take an RMD from a 403 to satisfy an RMD from a 401 or from an IRA. The RMDs have to be taken separately from each account.
You can see how this can get confusing. What happens then if you mess up? What if you take an RMD from an account, whereas the RMD should have been taken from a different account? Well, now we’re back to that twenty-five percent penalty. The government’s gonna look at it as you missed the RMD from the account that you should have taken it from but didn’t, and you might have to pay that twenty-five percent tax.
And from my experience as a retirement advisor for twenty-seven years, I find that most people don’t have to pay the twenty-five percent penalty just because they missed an RMD, but more often it’s because they took it from the wrong account.
If you’re of RMD age or you’re approaching RMD age pretty quickly and you wanna make sure that you understand the rules so you don’t have to pay that 25% penalty, you’re gonna wanna watch this animated video that we’ve created just for you, the listener of the Providence Financial Retirement Show. We’re gonna send this video to you absolutely free of charge, and it’s fun to watch because it’s animated, but it’s also really short. So it’s only seven or eight minutes, but in that seven or eight minutes, you’ll learn everything you need to know about required minimum distribution so you can avoid that penalty.
If you wanna receive this video, we’ll email it to you. You just need to go to our website and give us your information. The website to go to is providencefinancialradio.com/video. Again, it’s providencefinancialradio.com/video. Give us your information and we’ll email it to you shortly, and you’ll be able to learn what you need to know to avoid that 25% penalty when it comes to RMDs.
To claim your free video, just go to providencefinancialradio.com/video and you’ll have it shortly.
I’m Anthony Saccaro. Thank you for being with us today for the Providence Financial Retirement Show. We’re taking our entire show today, and we’re answering two questions in depth. Right now, we’re answering a question from Marcus that really was four or five questions having to do with required minimum distributions and IRAs, and that’s what we’ve been discussing so far. And in a few minutes, we’re gonna have another question about Social Security, so we’ll spend the latter half of our show talking about that.
But for now, back to RMDs. What if you are approaching RMD age, but you’re not there yet? Is there anything you can do to be proactive and to actually be smart with your RMDs? Marcus had this incorporated into his question as well. The answer is 100% emphatically yes. As a matter of fact, one of the most common mistakes that I see people make is they believe that they should just wait until they get to their RMD age and then start taking the forced withdrawals like the government tells them to.
Most of the times, that’s a mistake. That’s being reactive instead of being proactive. And here on the Providence Financial Retirement Show, if you’re a regular listener, you know that I often talk about being proactive instead of reactive. If you’re being reactive, then you’re following the government’s plan, and that usually means that the government benefits more than you do. Whereas if you’re actually proactive about it, you can put yourself in the driver’s seat and take the government out of it.
One of the most powerful ways to be proactive is to use Roth conversions. If you don’t know what that is, that means that you can take money out of your IRA account or your retirement account, convert it to a Roth IRA, pay the taxes on the conversion, but then any amount that’s in the Roth IRA is gonna grow tax-free forever and not be subject to required minimum distributions.
You’re gonna have to pay tax on your withdrawals no matter what, but Roth conversions allow you to be proactive and pay the tax on your terms instead of on the government’s terms. If you’re already of RMD age and you’re already making withdrawals, you can still do conversions, but now the conversions are added on top of your RMDs, and your RMDs are acting as a headwind for your conversions because that’s gonna be taxable income. Any conversions you do are gonna be over and above the RMDs. Whereas if you’re under RMD age, there are no RMDs to contend with, which then makes conversions much more beneficial.
One of the conversion strategies that we’ve often used for our clients at Providence Financial has to do with filling up the bucket. At least that’s what I call it. Filling up the bucket simply means that whatever tax bracket you’re in, you do a conversion of the amount of your IRA that will take you up to the top of your current tax bracket. That way, you’re not gonna pay any more tax on the amount converted than you do on your other income. And really, it’s a beneficial way of doing Roth conversions.
Let me give you an example. Let’s say that you’re making seventy-five thousand dollars from your pension, your Social Security, whatever other income you have. If you’re married and you’re over sixty-five and you’re filing joint, you can actually make a little over a hundred thousand dollars before you ever leave the twelve percent tax bracket. This means you could convert $25,000 and only pay 12% tax on it because that $25,000 takes you to the top of your current tax bracket. That’s what I mean by filling the bucket.
Once that money then has been converted to a Roth IRA, you’ll never have to pay tax on it again because it will be tax-free forever. You pay the tax now, and the Roth IRA grows tax-free indefinitely.
And I certainly hope that now you have a better understanding of required minimum distributions because we’ve talked about when you have to take them, how much you have to take, and where to take them from.
Marcus, thank you for spurring on this conversation with your question that we asked at the beginning of this show. If you’d like to get better educated about RMDs so you can make sure to avoid that 25% penalty, I wanna send you a copy of More Life Than Money absolutely free of charge. And if you want a free copy of More Life Than Money, just let us know by going to providencefinancialradio.com/book. Again, it’s providencefinancialradio.com/book. Leave us your information, and we will ship it right out to you, and you’ll have it in just a few days.
Once again, to get your free copy of More Life Than Money, just go to providencefinancialradio.com/book and you’ll have it shortly.
Thank you for taking time out of your day to join us for the Providence Financial Retirement Show. My name is Anthony Saccaro, and this is really a two-part show, kind of a two-for-one deal, if you will. We spent the first part of our show answering a question from Marcus about required minimum distributions, and now we’re gonna answer a question from Diane that’s gonna take us through the rest of the show, and we’re gonna talk about Social Security in depth.
Let’s move into our next question, which comes from Diane in Thousand Oaks. She wrote in this, “I’m sixty-two and I’m still working, but Social Security has been on my mind lately. I’ve got a handful of questions. I keep going back and forth. First, when should I start actually taking my benefits? At sixty-two, at my full retirement age, or should I wait until seventy? Second, I keep hearing that if I claim early while I’m still working, I could lose some of my benefit. Is that true? And third, my husband earned quite a bit more than I did over our careers. So how do spousal benefits work for someone like me? Finally, I just want to understand how my benefit even gets calculated in the first place, and I’d love for you to take us through all of that.”
Diane, I just want to thank you for taking the time out of your day to write in that question, and I’m going to do the best I can to give you some things to think about. When it comes to taking Social Security, it’s really a big decision. I might even say that it’s a bigger decision than most people think of when they decide to take it.
I talk to people all the time that give me some reasons that don’t really hold up as to why they decided to start taking it early or why they decided to wait. Many times, the final decision that someone makes to take Social Security comes from a trusted friend or colleague. It seems like when someone tells you or makes a suggestion to take it at sixty-two or to wait until seventy, that seems to get locked into someone’s mind. Most of the times, though, this individual doesn’t know all the specifics about your situation, and I think that could be a very dangerous way to make a decision that’s gonna affect you for the rest of your life.
Let’s talk for a minute about how Social Security is calculated. The amount that you’re going to get is going to depend on the highest thirty-five years of income that you earned. It’s a pretty complex formula, but it’s all based on the highest thirty-five years of your average income. After this formula has been applied to your highest thirty-five years of average, the Social Security Administration is gonna come up with something called a PIA, which stands for primary insurance amount, and it’s that amount that you’re going to receive at your full retirement age.
And if you’re not collecting Social Security yet, then your full retirement age is gonna be sixty-seven years old. The easiest way for you to find out how much you’re going to get at your full retirement age is gonna be just to go to socialsecurity.gov and create a free account and download your statement, and it’s gonna tell you how much you would get at sixty-two, at your full retirement age, and if you were to wait until seventy.
There’s a caveat. One thing you need to know is that none of these numbers include any cost-of-living adjustment. If you’re sixty-two years old and you’re looking at the amount that you would receive at seventy, well, there’s eight years of cost-of-living adjustments that are gonna be added to that amount. So your Social Security benefit at seventy is actually gonna be probably quite a bit higher than it actually says on your statement. That’s the easiest way to get your statement. Just go to socialsecurity.gov.
I wanna pause for just a minute before we continue our Social Security discussion because if you’re approaching Social Security and you wanna learn more, I wanna send you a free animated video that we’ve created, and it talks all about Social Security and what you need to know. We’ll email it to you absolutely free of charge, but you have to let us know that you want it. You can get it by going to providencefinancialradio.com/video. Again, it’s providencefinancialradio.com/video. Leave us your information, and a video will show up in your inbox shortly, and you’ll learn what you need to know about Social Security so you can make the best decision possible as to when to file based on your situation.
And it’s a fun video because it’s animated, and it’s only seven or eight minutes long, but you’ll learn a lot in that time because it’s very power-packed. Just go to providencefinancialradio.com/video and you’ll have it soon.
If you just hopped on, you’re listening to the Providence Financial Retirement Show. I’m your host, Anthony Saccaro. We are your retirement income source, and this is the place where retirees come for income. We’re in the middle of a good discussion answering a couple of questions from Diane about Social Security. We’ve already uncovered how Social Security is calculated, and we’ve even talked about the primary insurance amount, which is the amount that you would get at full retirement age.
I wanna continue our discussion, though, by talking about taking it early or waiting, because there’s a lot of mixed views on this as to what you should do. There are some people who are adamant about taking it at sixty-two years old, no matter what, and there are some people that are adamant about waiting until seventy, no matter what. Neither one is wrong, but you need to know what the difference is, and you need to know how it works.
If you take it at sixty-two, you’re only going to get seventy percent of the amount that you would’ve gotten had you have waited till full retirement age. And if you wait beyond full retirement age all the way until seventy, then for every year you wait, you will have gotten an eight percent bonus every single year for waiting.
So the earlier you take it, the less you get. You can’t take it earlier than sixty-two unless there’s an exception, like you’re disabled or widowed or something else, and you don’t wanna wait till after seventy, because after seventy, it doesn’t grow anymore, so there’s no point. So somewhere between sixty-two and seventy years old is when most of you are gonna wanna start taking Social Security.
The number one conversation that comes up when I’m talking with someone about Social Security, especially someone that wants to take it at sixty-two, is the fact that if they wait until seventy, they will have missed eight years of Social Security payments. They’ll get more at seventy, but those eight years that they could’ve been collecting Social Security, those are gone.
And that’s why most people think that taking it at sixty-two might make sense. What’s important for you to understand, though, is that Social Security is all designed to break even around eighty years old anyway. So if you take it at sixty-two or if you wait until seventy, by the time you turn eighty, you’ll have gotten about the same amount.
The gamble that you’re taking then is not that you’re gonna live to ninety or you’re gonna live to a hundred. Really, you’re betting on living to eighty. Here’s the thing, though. If you wait until seventy to start collecting and you make it to eighty, at eighty years old, your checks are gonna be a whole lot bigger than if you started taking Social Security at sixty-two.
Let me give you a tangible example. If you earn the maximum Social Security benefit for the last thirty-five years and you start collecting at sixty-two years old, by the time you get to eighty years old, your benefit’s gonna be a little less than five thousand dollars. But if you were to wait till seventy, when you get to eighty years old, your benefit’s gonna be a little more than eight thousand eight hundred dollars. About 40% more than if you had started collecting at 62 years old, and you’re going to get this amount for the rest of your life.
And to be fair, both of these numbers include the average cost of living adjustment that Social Security has provided since 1935, and that is 2.7% per year. But regardless of what the cost of living adjustment actually is, you’ll get a whole lot more at 80 if you wait till 70 than if you were to start taking it at 62 years old.
And if you’re one of the fortunate who make it to 90 years old, if you started claiming at 62, your benefit would be about $6,450, whereas if you waited until 70, your benefit would be about $11,500. That’s a significant difference in income just because you waited till 70. Furthermore, if you look at Social Security through the eyes of lifetime income, if you start taking it at 70 and you live to 90 years old, if you’re married, it’s not uncommon when we run a Social Security report to see that the amount of additional income over your life that you would have received is a couple hundred thousand dollars more by waiting until 70 than filing at 62 years old. It can be a dramatic difference.
As a matter of fact, since we’re on the topic of Social Security and the reports that we often run for our clients at Providence
Financial, I’m gonna offer you a complimentary Social Security report where we will take a look at your situation, we’ll collect your Social Security statements, and we’ll run a report, and that report will tell you what the difference is for you depending on when you file, whether you file at 62 or whether you file at 70. If you want this report, I’m making it available to you absolutely free of charge, but you have to ask for it, and you can do that by going to providencefinancialradio.com/report. Again, it’s providencefinancialradio.com/report. It’s gonna be eye-opening for you because you’ll learn mathematically when is the best way to file for Social Security for you.
And if you wanna receive it, I’m making it available at no cost, no obligation. Just go to providencefinancialradio.com/report and someone from my office will be in touch with you shortly to let you know what we need in order to get that report to you.
I’m Anthony Saccaro. Thank you for spending your day with us. You’re listening to The Providence Financial Retirement Show. We’re in the middle of a great show, and it’s kind of a two-parter because the first part of this show, we answered a question from Marcus about IRAs and retirement accounts, and more specifically, required minimum distributions.
Now, we’re in the middle of a discussion answering a multifaceted question from Diane about Social Security. So we’re digging deep into that topic. Let’s jump back into our current topic of Social Security, though, and I wanna spend some time talking about a couple different benefits that are often misunderstood.
One of the parts of Diane’s question had to do with spousal benefits. She mentioned that her husband was a higher income earner, made a lot more money than she did, and is there a spousal benefit that’s available to her? Many of you are not familiar with the Social Security spousal benefits, which means I should take a minute and explain how they work.
When it comes to Social Security, if there was one breadwinner spouse and one spouse that didn’t make a lot of money because they were raising the kids or whatever other reason, then the non-breadwinner spouse will be able to collect the higher of their own Social Security or half of the breadwinner’s primary insurance amount.
And again, that’s the amount that they would get at the full retirement age. Let me come up with a real easy example for you then, so you understand how this works. Let’s say that the breadwinner spouse qualifies for $2,000 per month. That’s the primary insurance amount based on their own working record.
And then let’s say that the non-breadwinner spouse, their Social Security is only $800 per month based on their working record. Because the $800 a month on their own record is less than 50% of the $2,000 per month that the breadwinner is gonna get, the non-breadwinner spouse will get that 50%, which is $1,000 a month. That’s $200 a month more. And in short, that’s how the spousal benefit works.
This benefit is available while both spouses are alive. It often gets confused, though, with the widow’s benefit or the survivor’s benefit. That benefit says that when one spouse passes away, the surviving spouse gets to keep the larger of the two benefits. They’re gonna lose the smaller benefit, but they get to keep the larger of the two. So in our example, if the breadwinner spouse was earning $2,000 per month and the non-breadwinner spouse was getting $1,000 per month from their spousal benefit, if the breadwinner spouse passes away, the non-breadwinner spouse will lose their $1,000 per month, but will start collecting the $2,000 per month that the breadwinner spouse was collecting.
And that’s a fairly significant benefit. What you have to remember, though, is that no matter what, if you’re collecting two Social Securities, upon the death of one spouse, you’re going to lose the smaller Social Security benefit, and that has to be planned for. If you don’t plan for it, it’s certainly going to affect the amount of income you’re gonna receive from Social Security when one spouse passes away.
The widow’s benefit, though, is often confused with the survivor’s benefit. I remember one time I was doing a workshop, and I had a lady in the front row sitting next to her husband who asked a question, how does she get the survivor’s benefit? And she really meant the spousal benefit, but she said the survivor’s benefit.
And I kinda laughed and said, “Well, your husband would have to die.” And of course, the whole room laughed because they knew that it was a mistake and that she had just asked the question wrong. Either way, we kind of all found it funny, except for her husband. He didn’t laugh too hard.
On top of the spousal benefit and the survivor’s benefit, there’s also the divorced spouse benefit and the divorced widow’s benefit, and these two benefits are often missed. We don’t have time to explore them thoroughly through this show, but if you wanna learn more about when to file for Social Security and the benefits that are available to you through Social Security, we’ve created an animated video that talks just about Social Security so you can understand the benefits that you might be entitled to and get the information you need as to when is the best time to file for you.
If you’d like to get that animated video, we’ll give it to you free of charge. We’ll just email it to you, and you just have to let us know where to send it, and you can do that by going to providencefinancialradio.com/video. Again, it’s providencefinancialradio.com/video, and shortly you’ll have an email in your inbox.
You’ll be able to watch this video. To get the video, just go to providencefinancialradio.com/video and you’ll have it shortly.
I’m Anthony Saccaro. You’re listening to the Providence Financial Retirement Show. We’re in the middle of an in-depth discussion about Social Security. We’ve already covered how Social Security is calculated, what your benefit’s gonna be. We’ve talked about some things to consider with regards to should you take it early or should you take it late. We now talked about the spousal benefit and the survivor’s benefit.
But I now wanna move into another question that Diane had, which is really what spurred on this conversation. She asked if she is working at 62 and yet started taking Social Security at 62, is there a penalty for doing that? And I wanna make sure to answer that part of her question as well, too.
The direct answer to Diane’s question is, it depends. Let’s take a few minutes and talk about the Social Security rule. Social Security has set a rule in place that says that if you’re under full retirement age and you’re still working, you can make up to $21,000 and change, and there won’t be any type of penalty at all. That’s not a problem. But for every $2 that you make over $21,000, Social Security is gonna want $1 of that back.
If you’re collecting Social Security and you make $10,000 too much, you divide that $10,000 by two, that’s gonna give you $5,000, and that’s the amount that you’re gonna have to pay back to Social Security come tax time.
And this is simply the way the rule works. To be fair to Social Security, though, when you pay that $5,000 back, they’re gonna put it back in your formula, and they’re going to recalculate the amount of Social Security income you would get at your full retirement age and beyond because you had to pay this money back.
So it’s not really a penalty in the true sense of the word, but when you have to write the check, it’s gonna feel like a penalty. The trap here that you need to be aware of, though, is that Social Security, and you might not even know how much you make at a given year until you do your taxes the following year.
It’s not as if you can have Social Security deduct 50% of your Social Security check because they don’t know how much you’re gonna make. The only time you’re gonna have found out whether you’re subject to having to pay back Social Security any of your benefit is gonna be during tax season when you’re doing all of your tax returns.
That’s when you’ll find out how much extra you made and how much you have to pay back. You’re probably also curious to know what counts as earnings for this penalty. The good news is it’s only wages and self-employment income. It’s not your pensions. It’s not your investments. It’s not IRA withdrawals or RMDs or rental income. It’s only actual wages.
If you start taking Social Security early then and you have no actual wages, the rest of your income doesn’t apply for this penalty. And that’s good news for those of you who have started taking it early and are not working. If you are gonna file for Social Security early, though, then you need to be really familiar with this rule so that you don’t get hit hard at tax time.
Hopefully, that makes sense. And I wanna take a minute and thank Diane for writing in her question, which really has served as our conversation for the latter half of this show. If you’re like Diane and you have a lot of questions about when to file for Social Security for you, I wanna offer you that Social Security report that I offered a little earlier in the show, and that will allow us to take your Social Security statements and run an analysis to determine what’s the best time to file Social Security for you.
We’ll look at it through the lens of lifetime income. And oftentimes when we run these reports, the amount that a couple would lose if they were to live to 90 could be one or two hundred thousand dollars of lost lifetime income just by filing at the wrong time, by filing too early. If you think having this report would be helpful, I’m gonna give it to you free of charge.
You just have to go to providencefinancialradio.com/report and give us your information so that we can reach out to you and let you know what we need in order to get your customized Social Security report to you. To claim your free report, go to providencefinancialradio.com/report, and you’ll hear from someone within just a few days.
One more time, the website you need to visit is providencefinancialradio.com/report. And when you get your report, it’s probably gonna be a real eye-opener like it has been for so many others.
I’m Anthony Saccaro. Thank you for spending this time with us. If you’ve been with us for the entire show, then you know the first part of the show we answered a lot of questions thoroughly about required minimum distributions, and in the second half of the show, we shifted our conversation to Social Security.
Thank you again for joining us for today’s Providence Financial Retirement show, where it truly is all about the income. Have a great week, everyone. God bless.
Disclaimer: This transcript is provided for educational and informational purposes only and reflects a general discussion from a live radio broadcast. It is not intended as personalized financial, tax, or legal advice. Individual circumstances vary, and listeners should consult a qualified professional before making decisions.