Social Security windfall rules affect more retirees

Your Money

November 04, 2007|By Janet Kidd Stewart | Janet Kidd Stewart,TRIBUNE MEDIA SERVICES

I retired a few years ago from the military after 20 years. Does the windfall elimination provision reduce my future Social Security benefits?

A number of factors could throw you under the provision, including how long and how much you paid into Social Security from your non-military employment over the years.

Up to 9 percent of future retirees could see their Social Security benefits trimmed by this provision, which dates to 1983, according to research published in the Journal of Financial Planning.

Intended as a way to preserve the government program's solvency, the provision keeps workers from receiving maximum benefits while they also receive pensions from jobs not covered by Social Security. This includes many teachers, public employees and military workers who earned retirement benefits in a separate system, but who also worked in Social Security-covered jobs long enough to qualify for benefits.

The ranks of those being affected are swelling because of an increase in state-level employees, as well as the overall baby boom generation, reaching retirement age, said Richard Mason, assistant accounting professor at the University of Nevada in Reno and an author of the research.

About 942,000 Americans were affected by the provision as of June, said Social Security spokeswoman Jacqueline Jennings. That represents about 3 percent of retired workers drawing benefits.

The so-called double dipping occurs when workers' benefits accrue at a greater rate because their other income isn't counted in the Social Security benefit formula.

Most workers' earnings are multiplied on a tiered scale to compute their benefits, which means lower-paid workers will receive benefits that replace a higher percentage of their pre-retirement income than higher-paid workers receive. For workers turning 62 this year, the first $680 of their average monthly earnings is multiplied by 90 percent, the next $3,420 by 32 percent and the rest by 15 percent.

But under the windfall provision, the 90 percent factor is cut to 40 percent, though there are several exceptions and limits on how much can be cut. The factor is not reduced for workers with 30 or more years of "substantial" earnings from work covered by Social Security, for example. And for workers with 21 to 29 years of substantial earnings, the factor is cut 45 percent to 85 percent.

Beginning this year, annual Social Security benefit statements carry a warning that the stated benefits could be reduced by the provision. See to figure the estimated impact on your benefits.

There is a downloadable calculator available on the Social Security Web site that will do this for you, but using it can be cumbersome. As an alternative, people near retirement age can contact their local Social Security office for an estimate, Jennings said.

I have received a substantial long-term capital gains payout in my IRA. While I know the money will not be taxed as long as it stays in the IRA, it will be taxed at my full tax rate, rather than as capital gains when it is withdrawn. Is there any way to have this taxed as a capital gain?

I hope this wasn't company stock that you rolled from a 401(k) plan into an individual retirement account. If that had been the case, you might have qualified to roll the stock to a taxable account instead of an IRA and paid only the capital gains rate on the shares' growth when you sold the stock.

You can't go back and undo the IRA rollover, said James Lange, author of Retire Secure! Pay Taxes Later - The Key to Making Your Money Last As Long As You Do.

Although you can't get around paying income tax on the gain, Lange said, the good news is that you don't have to recognize the gain immediately.

Instead, he suggested converting over time the IRA to a Roth IRA (assuming your adjusted gross income is $100,000 or less), paying income taxes on the withdrawals and reinvesting in a Roth, where future growth and distributions are tax free.

Janet Kidd Stewart writes for Tribune Media Services.

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