Here's What You Need to Know: For Americans still at work, there is a fairly easy way to avoid taxation while collecting Social Security.

The Social Security system has proven to be one of the most popular government programs in the United States. By sending out a monthly cash payment to retired Americans, the program has served as a reliable source of income for seniors who were not able to save for themselves during their careers. Recent polls have suggested that four in five Americans continue to support the payments at their current level, and while the Social Security Administration’s (SSA) trust fund faces a looming budget crisis in the next two decades, there is little doubt that the program will continue to be fully funded for the foreseeable future.

While the SSA has made clear that the monthly payments, amounting to roughly forty percent of a person’s pre-retirement income, are not intended to fully substitute for personal savings, for many seniors, they do. A 2020 survey conducted by financial firm Vanguard concluded that one-third of Americans had saved less than $10,000 for retirement. For these people, maximizing their finances in retirement can be critical, and it can lead some to take on work, in addition to their benefits.

Unfortunately, a major challenge facing these retirees is that Social Security benefits are taxed. While the payments on their own are usually not subject to taxation, seniors with additional income are often taxed up to fifty percent on their benefits once their total income exceeds $25,000 (or $32,000 for married couples). Taxes can increase even further, to up to eighty-five percent, on income levels that exceed this.

The rationale for such taxes is that wealthier Americans who continue working will not need Social Security benefits. However, while the taxes were passed in the 1980s and 1990s, the cost of living for seniors has substantially increased in the years since, while the value of the dollar has decreased due to inflation—meaning that the income limits specified in the tax code are now probably too low, and hence making it difficult to work.

Fortunately, for Americans still at work, there is a fairly easy way to avoid taxation while collecting Social Security: by saving during one’s career in a Roth IRA. Withdrawals from a Roth IRA are not considered taxable income, meaning that one can deposit funds in the account throughout one’s life and withdraw them tax-free upon retiring.

For seniors who have already reached retirement age without opening a Roth IRA, it is too late. However, there has recently been pressure on Congress to update how taxes are applied to Social Security payments, so all hope might not be lost.

Trevor Filseth is a current and foreign affairs writer for the National Interest.

This article first appeared in August 2021.

Image: REUTERS/Carlos Barria