The Hidden Tax Trap on Social Security and How to Plan Around It

When most people begin thinking about retirement, the focus usually lands on when to claim Social Security, how to start drawing from retirement accounts, and whether their savings will hold up over the long run. What is often overlooked is the way Social Security is taxed, and how those rules can create a surprising and sometimes costly outcome.

This is what many refer to as the “tax torpedo.” It happens when additional income from sources like IRA withdrawals, pensions, or part time work causes a much larger portion of your Social Security to become taxable. The IRS uses something called “provisional income” to make this determination. Provisional income is calculated by adding together your adjusted gross income, nontaxable interest, and half of your Social Security benefits. Once you cross certain thresholds, up to 85 percent of your benefits can be subject to tax.

The steepness of the phase in is where the real problem lies. An extra thousand dollar withdrawal from an IRA may not only be taxable itself but could also make another eight hundred and fifty dollars of your Social Security taxable. The combined effect is that your marginal tax rate is far higher than what the tax tables alone suggest.

The good news is that with thoughtful planning you can often reduce or even avoid this tax trap. Coordinating withdrawals from different accounts in the right order can give you much more control over taxable income. Taking advantage of Roth conversions before you begin Social Security is another way to lower future taxable income and soften the impact. Even the way you spread withdrawals across multiple years can make a difference. And if you are charitably inclined, using qualified charitable distributions from IRAs can reduce taxable income while supporting causes you care about.

These strategies are not about saving a few dollars here or there. Over the course of retirement, they can add up to meaningful savings and provide more reliable income for day to day living. The challenge is that the rules are complex and what works best depends on your mix of accounts, your retirement age, and your bigger financial picture.

At Oak Summit Wealth Management, I combine investment management with advanced tax planning. As a Chartered Financial Analyst (CFA) Charterholder, Certified Financial Planner (CFP), and Enrolled Agent (EA), I take a holistic approach that helps clients avoid hidden pitfalls like the tax torpedo while building retirement strategies designed for stability and efficiency.

If you are approaching retirement or already collecting Social Security, this is the right time to look at how your benefits interact with your other sources of income. Even small adjustments in timing or withdrawal strategies can mean thousands of dollars saved over the course of retirement.