Side Fund Increases Benefits When Cutting Social Security Taxes

After our discussion about ways to save on your Social Security taxes, you might be wondering how these savings impact your Social Security benefits. After all, paying less into Social Security results in receiving lower benefits later in life. 

However, there is a strategy to come out ahead—by creating a side fund and investing the savings from reduced Social Security taxes.

Example Scenario

Let’s say your current taxable Social Security income is $168,600. Using strategies such as forming an S corporation or partnership could reduce your taxable income to 40 percent of that amount, or $67,440. This reduction saves you $12,543.84 in Social Security taxes annually.

If you invest these savings into a side fund with a 3 percent after-tax return over 35 years, your side fund could generate a monthly benefit of $3,785.47 for 20 years. Combined with your reduced Social Security benefit of $3,030.93, this totals $6,816.40 per month—$1,865.60 more than you would receive if you paid Social Security taxes on $168,660.

Additional Considerations

While reducing your Social Security income can lower your future benefits, it does not affect other important benefits such as:

• Spousal retirement benefits
• Medicare eligibility at age 65
• Potential disability benefits
• Dependent benefits for children or other dependents

Key Points to Remember

To qualify for Social Security retirement benefits, you need 40 quarters of coverage.

Social Security calculates your retirement benefits based on your highest-earning 35 years.

Conclusion

Strategically reducing your taxable Social Security income and investing the tax savings can leave you better off financially. You should consider this approach as part of your overall retirement planning strategy.

If you want to discuss your Social Security taxes, please call me on my direct line at 408-778-9651.