Private Pension Plans Affected by Social Security Benefits

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    Significance

    • Your pension isn't affected by Social Security payments. The Employee Retirement Income Security Act (ERISA) protects your pension benefits from being lost. Once you start receiving pension payments, they are not reduced. This is because pension payments are derived from annuity payments. Annuities are insurance policies that guarantee a set payment, which remains unchanged, for your entire life.

    Benefit

    • You receive your pension payments on a guaranteed basis. You will receive your Social Security payments as well. Pensions and Social Security payments were originally meant to function as part of a total retirement system that would include your own personal savings on top of these benefit payments. Your pension payments are guaranteed never to fall below your defined benefit payment amount.

    Warning

    • While your pension payments aren't affected by Social Security, your Social Security might be affected by your pension payments. One-half of your Social Security income plus your pension payment must not exceed $25,000 if you are single or $32,000 if you're married. These limits are part of the Social Security annual income test. If these limits are exceeded, 50 percent of your Social Security income is taxable. If you exceed $34,000 and $44,000, respectively, 85 percent of your benefits are taxable.

    Solution

    • A solution to keep your Social Security from being taxed is to take your pension as a lump-sum amount. Convert this pension savings to a Roth IRA. Then, take income payments from the Roth using an annuity policy. Roth IRAs are not counted in the income testing for taxation of Social Security benefits. Additionally, the annuity payments will mimic the payments you receive from your pension. On top of that, all income from the Roth is income tax-free. You do pay income tax on all of the money you initially convert to the Roth, however.

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