Social security cards and money

Dear Senior Living Adviser,
I am married and semi-retired. We live off my partial income and my husband’s Social Security and retirement fund. I just recently started taking my Social Security payments early, with the intention of reinvesting the money in an individual retirement account, or IRA.

I know I can put away at least $6,000 without causing any penalties, and I can begin another savings plan, too, when I meet that goal.

I have an existing retirement fund, which is a guaranteed annuity. My goal is to save the Social Security money for the future. When my husband passes, his retirement fund will go with him and I’d like to have this extra cushion. I am 62 and my husband is 73. What kind of IRA should I start? An SEP (Simplified Employee Pension Plan), a Roth IRA, a 401(k)?
— Melanie Money

Dear Melanie,
Your ability to contribute to a traditional or Roth IRA depends on your level of earned compensation. Social Security benefits don’t count as earned compensation, so your ability to contribute to an IRA is based on the income you earn from working.

However, cash is fungible, meaning if you make more than $6,500 in a year from your work, you can contribute up to $6,500 of your Social Security benefits to fund an IRA in 2015 — $5,500 plus $1,000 for those over age 50.

The decision to take Social Security benefits early was probably a mistake. You have the ability to reverse that decision and repay Social Security the benefits you’ve received, but only in the first year of receiving benefits. I’d suggest working with a consulting firm like Social Security Solutions to determine your optimal claiming strategy and whether you should pay back your Social Security benefits.

If your earnings are too high, Social Security will withhold part or all of your Social Security benefit. You’ll get that money back later, over time, after you’ve reached full retirement age. It’s called the Social Security Earnings Test, and it’s especially relevant for people who receive retirement benefits early and keep working — another reason to work with Social Security Solutions on a claiming strategy.

Should your husband die before you, you can receive survivors benefits based on his work record, if that is more than your benefit. That option could be one reason to justify taking benefits early instead of waiting until your full retirement age.

If you waited until your full retirement age to claim benefits, you could get a spousal benefit based on your husband’s work record and earn delayed retirement credits on your work record up to age 70.

SEP Plans can provide a significant source of income in retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. Unless you’re self-employed, the decision to fund a SEP is your employer’s, and the employer is making the contributions.

Likewise, a 401(k) is offered by your employer. If your employer offers a 401(k) plan, you can choose to contribute part of your earnings to that plan. If your employer matches all or part of your contributions, that makes a 401(k) plan more attractive than the IRA, at least up to the limits of the company match.

The decision between a Roth IRA and a traditional IRA for you will come down to the tax bracket you face now versus the tax bracket you expect to be in when you take distributions out of the account. If you expect to be in a lower tax bracket when you take distributions in retirement, why pay the taxes today by contributing to a Roth IRA? This presumes that you expect to use the money during your lifetime and that you’re not concerned about creating a stretch Roth IRA for your retirement account beneficiaries.

Talk to your accounting professional if you’re still not sure what type of retirement savings account works best for you.

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