The Social Security Administration (SSA) has announced the changes for 2021. The Maximum Social Security wage base has increased by 3.7% ($142,800 from $137,700 in 2020) Of the changes reported the SSA is giving a 1.3% Cost of Living Adjustment (COLA) for the new year. An increase in the full retirement age by an additional two months ( to 66 years and 10 months) for people born in 1959. Higher taxes for retirees who are high earners, and increased maximum benefit payouts to $3,148/month from $3,011 in 2020.

A 3.7% higher increase in the wage base will subject an estimated 12 million individuals with higher incomes with a significantly higher tax bill. The high increase comes from an increase in the wage base data, in conjunction with the Consumer Price Index, which is meant to reflect real wage growth. The maximum tax in 2021 will be $17,707.20 which equates to a maximum amount of $8,853.60 withheld from employee pay (employers are responsible for 1/2 of an employees social security and Medicare taxes (FICA). Self employed individuals will be hit extra hard by this because those individuals pay both sides of the tax.

A 1.3% COLA adjustment for the average American on social security translates to an additional $20/month, or an estimated monthly payout of $1,543 starting in January 2021.

The change in the full retirement age from 66 years and 8 months in 2019 to 66 years and 10 months in 2021 buys more liquidity for the already struggling social safety net. By increasing the full retirement age they are delaying the payment of benefits preserving the future value of the program, while decreasing the present value of the benefits recipients collect. If you decide to take social security at 62 your benefits will be further reduced for those years and then in future years (at full retirement age) be adjusted to make up for the reduced benefits. (more info Here) In 2021 Social Security will reduce your benefits by $1 for every $2 you earn above $18,960. Additionally in the year you reach full retirement age in 2021 benefits will be reduced by $1 for every $3 you earn above $50,520/yr ( $4,210/mo). The year after you reach full retirement age you can work as much as you like and not lose any benefits at all.

Please remember taking Social Security benefits while working may have an unexpected negative consequence of putting you into a higher tax bracket, as up to 85% of social security benefits maybe taxed based on “Combined Income” thresholds. Which the SSA defines as your adjusted gross income + nontaxable interest + 50% of your Social Security Benefits.

Single Filers- If your combined income in 2020 as a single filer is between $25,000 and $34,000, 50% of your benefits maybe taxed, above $34,000 up to 85%.

Combined Filers (MFJ)- If your combined income in 2020 is between $32,000 and $44,000 50% of your benefits maybe taxed, above $44,000 up to 85%.

Planning Moment- Decrease the odds your Social Security will be taxed!

For Younger Investors- The above example is just another reason why Roth 401(k) and Roth IRA’s are such a great investment vehicle. They do not increase your Adjusted Gross Income as you take distributions because your account was invested using pre-taxed dollars! Roth IRA’s have no Required Minimum Distributions as well, unlike a traditional IRA or 401(k). Additionally a Roth 401(k) is subject to RMDs, but if you no longer work for your employer a conversion to a Roth IRA is simple , and you won’t be subject to the RMD. Allowing you to continually grow your wealth in a tax sheltered account!

For more experienced investors that may have a Traditional 401(k) or IRA. You can start to decrease the amount that is taxable by converting your income to tax-deferred investments or accounts such as a Roth. Obviously doing so will trigger paying taxes on disbursements. Talk to an experienced CPA who will devise a plan converting your funds while you are in a lower tax bracket, do not convert it all at once!

If you need any help regarding these issues, please reach out to Corridor Consulting, we would love to assist you in any issues you may have. If you’d like to schedule a consultation you can do so here.

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This article is not professional tax or legal advice for your specific circumstances. Consult with your professional adviser to better understand how these items may impact you, or how they’ve changed