The daily grind of going to work every day goes away when you retire, but so does your paycheck. You might depend on Social Security benefits plus other retirement income to pay your bills, and you might still have to pay income taxes. However, you won’t be paying Social Security and Medicare taxes unless you continue working.
Social Security, Medicare and Retirement Taxes
Social Security and Medicare taxes only apply to income earned from working as an employee or from self-employment. Payments you receive from pensions or annuities are not subject to either Social Security or Medicare tax. The Social Security Administration does not define investment earnings as work income. This means you don’t pay Medicare tax or Social Security tax on dividends from stocks, interest earnings, capital gains from the sale of assets and distributions from retirement plans like 401(k)s and individual retirement accounts. You pay a monthly insurance premium when you start Medicare coverage. The premium is usually deducted from your Social Security benefit check.
Boosting Social Security Benefits
People frequently continue working after starting Social Security benefits. If you do, the income you receive from work is subject to Social Security tax and Medicare tax. If you defer starting benefits and continue working, the Social Security Administration adds 8 percent to your retirement benefits for every year you wait to start benefits until you turn 70. For example, if you were born before 1955, full retirement age is 66 for Social Security purposes. If you defer Social Security for four years, that’s an extra 32 percent each month in your benefit check.
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