Last month, we wrote about saving money on your Social Security taxes. You may have wondered what this does to your Social Security benefits. That’s easy: the less you pay in, the less you get out. But if you create a side fund and invest the Social Security savings, you will come out ahead.

Example

You currently have taxable Social Security income of $168,600. You use strategies, such as forming an S
corporation or a partnership, from Smart Solutions That Decrease Social Security and Medicare Taxes to cut your taxable Social Security income to 40 percent of that, or $67,440.

With this cut, you save $12,543.84 in Social Security taxes: ($168,600 – $67,440) x 12.4 percent.

Let’s put the numbers to work. Say your Social Security income remains at $168,600 for the next 35 years, after which you retire at age 70. Your Social Security retirement monthly benefit will be $4,950.80.

If your Social Security income is $67,440 a year, your Social Security retirement income at age 70, 35 years from now, is $3,030.93. But your side fund investment of the $12,543.84 savings at 3 percent after-tax for 35 years produces a monthly benefit for 20 years of $3,785.47.

When you combine the side fund with the reduced Social Security income, you have a monthly total of $6,816.40,
or $1,865.60 more every month than you would’ve had without saving on Social Security taxes.

Of course, this depends totally on your development of the side fund. With no side fund, you would have a shortfall
of $1,919.87 ($4,950.80 – $3,030.03).

There’s More

Keep in mind that the retirement benefit from Social Security is only one aspect of Social Security. In this example
we used age 70, and that’s what we recommend for most taxpayers as the best beginning time, but you can qualify for the retirement benefit beginning as early as age 62.

In addition to the retirement benefits, you also

• qualify your spouse for a retirement benefit as early as age 62, even if your spouse never had
  earned income;
• trigger, at age 65, a wonderful medical system (Medicare) that applies for the remainder of your life;
• open the possibility for disability benefits should you suffer an injury today; and
• open up the possibility for dependent benefits for disabled, minor, or dependent children, even after
  your death.

Thus, even in the example above where you paid less to Social Security and reduced your retirement benefit, you
did nothing to hamper the benefits listed above.

Two Points

Two points to remember about Social Security:

1. You need 40 quarters of coverage to qualify for the Social Security retirement benefit (unless you
   qualify as a spouse).
2. Social Security bases your retirement benefit on your highest-earning 35 years.

Takeaways

While reducing your taxable Social Security income can lower your future Social Security benefits, strategically
investing the tax savings in a side fund can leave you financially better off in the long run.

In the example provided, the side fund investment compensates for the reduced Social Security income, resulting in
a higher overall monthly benefit.

Additionally, cutting your Social Security income doesn’t affect other important benefits such as Medicare, spousal
benefits, or disability benefits.

Have any tax-related or social security questions for us?

Book a call today and we’ll get you squared away!