People are allergic to taxes.
Taxes on Social Security benefits might be the most hated tax of all for retirees. Because this tax “sneaks up” on retirees it has earned the name the Tax Torpedo.
Taking a few minutes educating prospects on the unique way that Social Security benefits are calculated can open the door to more universal life, annuity and securities opportunities.
I have used this slide and simple presentation during seminars, on my PBS television appearance and during hundreds of face to face meetings with prospective clients.
Here is my presentation…
I start by explaining that it doesn’t take a lot of income to be at the highest threshold for Social Security taxation.
For example, a married couple would hit the top tax threshold even if total income was only $28,000 from Social Security and another $30,000 withdrawn from an IRA, 401k or other traditional retirement plan.
Let’s focus on the tax results of withdrawing just one single dollar in excess of this top threshold.
This one additional dollar coming from the IRA would cause one of our Social Security dollars to become 85% taxable!
And because the dollar withdrawn from the traditional IRA is also taxable, the total taxable income created by withdrawing just one single dollar when we are over the top threshold of Social Security taxation is $1.85.
Think about this for a minute. We only have one extra dollar. That dollar coming from our traditional IRA is 100% taxable and it causes one of our Social Security dollars to be 85% taxable. That single dollar created $1.85 of taxable income.
Assume an effective tax rate of 22 percent. The tax is not 22 percent of the single dollar withdrawn from the IRA. Instead it is 22 percent of the $1.85 of taxable income that the single IRA dollar created.
This total tax in 41 cents.
We only have one extra dollar and the effective tax rate on that dollar is 41 percent.
Many of your prospective clients will be applauded when they discover the full impact of Social Security taxation.
The major point that I try to make is that it doesn’t take a lot of income ($58,000 in the slide example), to get to the top tax threshold. And that if this was all the income that a married couple has, they are likely spending most or all of it just to pay their bills. This means that in order to have some fun, take a cruise or buy some gifts for the grandkids, most people will need to withdraw more from their traditional IRA or 401k. But with effective tax rates this high many people are reluctant to take withdrawals for things like vacations or playing more golf.
This Social Security tax explanation can attract more clients in a number of ways.
Income in the form of life insurance policy loans are not counted when calculating the top threshold for Social Security taxation.
Earnings from non-qualified annuities do not apply to the threshold until they are withdrawn.
Capital gains on securities don’t count in the threshold calculations until realized.
Withdrawals from Roth IRAs are not included in the threshold calculations.
The knowledgeable advisor might find several opportunities for reducing the impact of Social Security calculations. Prospects are eager to engage with advisors who can bring them these strategies.
It all starts by educating prospects on how Social Security taxes are calculated.
For seminars and workshops, I find that trying to explain all of this using a single slide can be a little confusing. Instead, I would suggest making five duplicate copies of the slide and deleting some of the numbers on each slide (easy to do in PowerPoint) so that you end up with a set of slides like the one that appears in this article.
Because each slide builds on the prior one, using this slide set allows you to keep your audience focused on the primary point(s) of each slide.
For face to face meetings with individual clients I have printed one copy of the complete slide and had it laminated. In these meetings it is fairly easy to use a pen or your finger to focus the clients attention on where you want it to be.