Self-Directed IRA Owner’s Guide to Tax on Social Security Benefits

Many Self-Directed IRA investors reach retirement age, begin taking Social Security Benefits and IRA distributions, file their taxes, and get a nasty surprise: Up to 50 percent of their Social Security benefits are taxable as income under current law.

The higher your income in retirement (whether from a Self-Directed IRA or otherwise), the higher the percentage of your Social Security benefits subject to income tax. Currently, the average American retiree pays taxes on about 44 percent of his or her Social Security Benefits.

It wasn’t supposed to be this way, originally. Back in 1984, when Congress first established an income threshold, above which Social Security Benefits would become taxable, the tax was only supposed to affect a small percentage of wealthier taxpayers. But Congress never indexed the threshold for inflation, and as the dollar became worth less and less and as the nominal dollar amounts of retirement income grew and grew, the effects of the tax crept further and further into the working class. A similar dynamic is now affecting an increasing number of Americans subject to the alternative minimum tax.

So how can you shield as much Social Security Income as possible from the tax? If you’re collecting a substantial pension from a former employer, there’s probably not much you can do, other than trying not to take benefits before you have to. But most people can benefit from adopting one or more of the following strategies to lower Social Security income tax exposure.

  1. Convert traditional Self-Directed IRA and conventional IRA assets to Roth IRAs. Yes, you’ll have to pay income taxes on the entire amount you rollover. And that will impact the amount of Social Security Income subject to the tax – but only in the year of the rollover. After that, any distributions from Roth IRAs or Self-Directed IRA assets will not count against you for the purposes of counting Social Security income tax.
  1. Tap your Self-Directed IRA or conventional IRA for income relatively early in retirement. Use your IRA to allow yourself to put off taking Social Security income. Yes, you deplete your IRA faster. But in later years, you’ll qualify for a larger Social Security benefit. This, in turn, may reduce the amount of IRA income you will need. Meanwhile, since your Social Security benefits are a larger percentage of your income and your taxable IRA distributions are lower, your income will be more tax efficient. A larger percentage of your Social Security Benefits will be exempt from tax than would otherwise be the case. (Research indicates that the ‘sweet spot’ for this strategy seems to be for people with retirement portfolios between $200,000 and $600,000, according to research by Social Security Solutions.
  1. Don’t rely on municipal bond income to sidestep the tax on Social Security benefits. Yes, the IRS excludes muni interest from ordinary income taxes in most cases. But they do force you to include it in Social Security Tax calculations.

American IRA, LLC specializes in assisting people who choose to self-direct their retirement accounts, rather than leave the decisions to Wall Street. Whether your interests are in real estate IRAs, gold and precious metal IRAs, private equity IRAs, or anything in between, we want to work with you to ensure your transactions are handled efficiently, while saving you thousands in fees in many cases.

To learn more, call us today at 866-7500-IRA(472), or visit us online at

We look forward to working with you.


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