Is it wise to begin drawing Social Security at full retirement age if I am still working full time and that same amount of money could be better invested into a work 403(b) or 401(k) plan by payroll deduction?
"On the surface it sounds like a very good strategy and if the numbers work out it could be a wise decision," said FPA member Karl Hicks, CFP®, chief executive of Leonard Financial Group. "However, the issue becomes complicated by income taxes."
"When you begin drawing on Social Security it becomes a part of your income tax calculation," Hicks said. "Depending on how much income you have for the tax year, you may pay income taxes on a portion of the Social Security benefits. You may be taxed on 50 percent of your benefits; you may be taxed on 85 percent of your Social Security benefits. It depends on how much income you have and your income tax filing status."
"So", he said, "the questions become how will starting to draw Social Security and changing your 403(b) or 401(k) plan deductions effect 1) your net take home pay and 2) your income tax calculation for the end of the year. This is also affected by how much of the Social Security benefit equivalent can be contributed to your 403(b) or 401(k) plan. Can you contribute a 100 percent equivalent or can you only contribute an amount equivalent to 75 percent?" Hicks asked. "This will affect how the numbers work out. These questions are best answered by a tax professional, like a Certified Public Accountant (CPA) or Enrolled Agent (EA)."
"The other issue to consider", Hicks said, "is whether postponing your Social Security will provide you enough of an increase in your benefits to offset any investment benefit of adding to your 403(b) or 401(k) plan. These questions can only be answered by taking a specific look at your personal situation and doing some number calculations and projections."
"On the surface it sounds like a very good strategy and could be a wise decision," said Hicks. "Unfortunately there is no simple 'yes' or 'no' answer, but this should give you some ideas of what needs to be considered in developing a good strategy that's right for you."