Social Security Federal Tax Strategy: Roth Accounts Help Reduce Income

When retirees draw from both retirement accounts and Social Security, federal taxes may apply based on their combined income. For example, a retiree with $30,000 from a 401(k) and $24,000 in Social Security would have a combined income of $42,000. Depending on this figure, benefits could be taxed up to 85%. To potentially avoid federal taxes, retirees can utilize Roth accounts, which do not count towards combined income calculations, allowing some to lower their taxable income below $25,000 or $32,000, thereby reducing tax liability.