The Retirement Account That Can Keep Your Social Security Benefits 100% Tax-Free

Detailed summary

Your Social Security checks can quietly shrink at tax time, and a hidden formula decides how much the IRS claims. One type of account keeps your savings out of that formula, but most retirees never consider it until too late.

Many retirees depend heavily on Social Security to make ends meet. If Social Security is your only income source in retirement, you'll probably get to keep your monthly checks in full without having to worry about paying taxes on your benefits.

But if you have retirement income outside of Social Security, your benefits could be at risk of taxes -- that is, unless you house your nest egg in the right account.

Social Security taxes on benefits hinge on provisional income. Provisional income is calculated as the total of your adjusted gross income (AGI), tax-exempt interest income (such as municipal bond interest), and 50% of your annual Social Security benefits.

If your provisional income falls between $25,000 and $34,000 and your tax-filing status is single, up to 50% of your Social Security benefits could be subject to taxes. Once your provisional income exceeds $34,000, up to 85% of your benefits could be taxed.

If your tax-filing status is married filing jointly and your provisional income is between $32,000 and $44,000, you could be hit with taxes on up to 50% of your Social Security benefits. Once your provisional income goes above $44,000, up to 85% of your benefits could be taxed.

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You might think this system is unfair given that Social Security benefits are earned by paying taxes on wages. Having benefits taxed might seem like double taxation.

Unfortunately, Social Security relies on taxes from benefits to cover its expenses. So when you pay those taxes, you're helping to keep benefits going. That may not seem like the best consolation prize, but it's just how the system works.

If you don't like the idea of having to pay taxes on your Social Security checks, one of the…

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