Keep more of your Social Security benefits
with effective tax planning

If you have 10 or fewer years left before you retire, it's time to focus on the specifics of your retirement income. To manage financially, you'll need to replace your paycheck with income from several sources.

These may include:

• Personal retirement savings
• A possible pension or annuity
• Earnings from a part-time or freelance job

Achieving financial freedom takes careful planning and preparation. That involves learning how income from one source may affect how your other income is taxed.

Understand how Social Security benefits are taxed

This is particularly true when it comes to the taxation of Social Security benefits. Social Security benefits start out tax-free, but as your income rises in retirement so does the portion of benefits that are taxed.

Before you make financial decisions that could affect how your Social Security benefits are taxed, make sure you understand:

• The tax rules
• Income thresholds
• The tax effects of your decisions

If you plan well during the years leading up to retirement, you can better manage the effects of taxes on your retirement income. And, you'll know what to expect should your income rise above the taxable threshold.

Your Social Security benefits will be taxed on a formula that includes your provisional income, or your adjusted gross income plus tax-exempt interest (from municipal bonds, for example), and half of your Social Security income for the year.

Provisional income range: Single, head of household, married filing separately, qualifying widower	Provisional income range: Married filing jointly	Percentage of Social Security benefits included in taxable income
Below $25,000	Below $32,000	All Social Security income is tax-free
$25,000-$34,000	$32,000-$44,000	Up to 50% of Social Security income may be taxable
$34,000 and up	$44,000 and above	Up to 85% of Social Security income may be taxable

If your income is near the thresholds in the chart above, to lower your taxable, or provisional income, consider converting some taxable investment income, such as interest earned on a certificate of deposit, into tax-deferred income — in an annuity, for example. See your tax professional to determine how this works for you. Depending on your income, this may or may not affect you.

Watch for reduced benefits if you take early distributions

If you choose to begin taking Social Security while you're still working, or before your full retirement age (full retirement age had been 65, however, beginning with people born in 1938 or later, that age gradually increases until it reaches 67 for people born after 1959), your benefits could be reduced as follows:

If you collect Social Security

When you're younger than full retirement age	In the year you reach full retirement age	When you're older than full retirement age
$1 is withheld from your benefits for every $2 you earn above the annual earnings limit of $14,160 in 2009.	$1 is withheld from your benefits for every $3 you earn above the limit. This applies only to earnings for months prior to turning the full retirement age. The annual earnings limit is $37,680 in 2009.	Your benefits are not reduced due to earnings.

Let's say you retire at age 62, begin collecting Social Security benefits, and then return to work part-time. If you're younger than full retirement age and exceed the annual income limit of $14,160, your benefits will be reduced by $1 for every $2 you earn.

If you're close to the point when your benefits would be taxed, consider working a little less or deferring some income into the next tax year to the extent possible. Some retirees work to make up to the earnings limit each year; the money they make by working is greater than the total tax they'll pay. Working increases your income, even when Social Security benefits are all taxed.

If you don't need the income from your Social Security benefits you could consider waiting as long as you can to begin receiving them. For every month you wait up to age 70, your monthly benefits will increase. For someone born in 1943 or later, the increase is 8% annually. Also, by avoiding taking early Social Security benefits, you won't face reduced benefits should you keep, or resume, working.

However, you may decide to claim benefits as early as age 62. Benefits are reduced for each month you receive them before your full retirement age. If 67 is your full retirement age, the reduction for receiving benefits at age 62 is about 30%. The reduction for starting benefits at other ages is as follows.

• The reduction for starting retirement benefits at age 63 is about 25%.
• The reduction for starting retirement benefits at age 64 is about 20%.
• The reduction for starting retirement benefits at age 65 is about 13.3%.
• The reduction for starting retirement benefits at age 66 is about 6.7%.

To learn more about tax-effective strategies and your Social Security benefits, meet with your financial advisor or tax professional.