'In many states, Social Security benefits are exempt from state income tax'

"At the federal level, for higher earners, up to 85% of Social Security benefits are taxable, effectively making 15% tax-free." (Photo subject is a model.)

Dear Quentin,

I read your article about Social Security ("Take the money while you can. I'm a CPA and tell my clients to take their Social Security early. Am I wrong?"), and I agree with your answer, up to a point. The reader was concerned about Social Security running out of money in 2032, per multiple reports, so he believes you should take it now if you're due to get it, to avoid disappointment later.

Higher earners need to consider how their income is generated when deciding at what age to claim Social Security. In many states, Social Security benefits are exempt from state income tax. Therefore, delaying benefits until 70 means that the larger benefit amount may be shielded from state taxation. For that reason, I'll happily wait. Waiting is the smart move.

At the federal level, for higher earners, up to 85% of Social Security benefits are taxable, effectively making 15% tax-free. Those considering claiming Social Security at age 62 and reinvesting the proceeds should also consider that doing so could generate additional taxable income and potentially push them into higher IRMAA and NIIT thresholds.

What do you and your readers think?

Waiting to Claim

Related: 'The numbers don't lie': If I had invested my Social Security in the S&P 500 I'd have $4 million. Is the system broken?

You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com. The Moneyist regrets he cannot reply to questions individually.

Social Security benefits can be taxed more lightly, so receiving a larger benefit later in life - when you may have less income - can mean a larger portion of your income is taxed at lower rates.

Dear Waiting,

All good points, but what's good for high earners is doubly true for lower earners.

Claiming at 62 and investing: Let's say your Social Security benefit is $2,000 a month at 62 (or $24,000 a year) versus $3,500 a month at 70 (or $42,000 a year). If you take the $24,000 at 62 and invest it, your point is that the investment returns will likely generate taxable income, potentially increasing your Medicare premiums and exposing you to the net investment income tax (NIIT), a 3.8% IRS surtax that's applied to high-income earners.

Claiming at 70: If, however, you waited until 70, you receive a much larger Social Security benefit, and a portion of that income, at least 15% at the federal level and potentially all of it at the state level, except for a few states, enjoys preferential tax treatment. Social Security benefits can be taxed more lightly, so receiving a larger benefit later in life - when you may have less other income - can mean a larger portion of your income is taxed at lower rates.

For every year you delay claiming past your Full Retirement Age $(FRA)$, 67 for you, until you reach 70, your monthly payout increases by roughly 8%. That kind of guarantee is difficult to compete with on the stock market. What's more, if you are the higher-earning spouse, waiting until 70 locks in the maximum possible benefit for survivor benefits if you predecease your lower-earning spouse.

Lower-income retirees might have more reason to take their Social Security earlier, depending on their marital status and other income (at 62 or 67). If the difference is between, say, $1,500 a month at 62 versus $1,950 at 67, and you have bread to put on the table and a mortgage/rent to pay, I can see why some people would choose to take it earlier, given the smaller dollar amounts. Lower earners may also have zero federal tax on Social Security.

Investing your Social Security

Investing with a 10% annual return: There are potential big gains and risks. If you take Social Security at 62 and invest the payments, he could accumulate more than $100,000 by 67, assuming a healthy 10% annual investment return. (Disclaimer: Markets are rarely predictable and some years could see a lower return.) Not only would you have a nest egg, but you would still have your Social Security payments of $1,600 a month at 67. So far, so good.

Investing with a 7% annual return: Taking a more cautious scenario: With a 7% annual investment return, your "take it early and invest it" strategy becomes less clear. In that scenario, investing the $1,600 benefit at 62 could reach $80,000 or more. You could end up with more money if you invest at 62, but that depends on how the market performs over those five years and your longevity. So it's more a choice about risk tolerance than mathematics.

Waiting to claim until 67: This provides no accumulated investment, but your monthly benefit would be 30% more. By then, it may be hard to beat those early invested withdrawals - not only would you be earning money on your $1,600-a-month early Social Security payments, but you would also be earning returns on the interest on that principal. Again, that's assuming those initial five years represent a bull market, rather than the downturn experienced in 2022.

If you claim Social Security at 62 and spend the benefits, the break-even point versus waiting until age 67 is in your early 80s. However, if you claim at 62 and invest the payments, assuming a consistent 7% annual return, it becomes extremely difficult to catch up. The same is true assuming a 10% annual return. As always, markets do not move in straight lines, and a significant bear market early in retirement could upend those plans.

But the analysis is more challenging when you account for taxes. If you claim Social Security early and invest the benefits in a taxable account, expect to pay long-term capital gains taxes (a top rate of 20%) and, for higher earners, the 3.8% net investment income tax. Your modified adjusted gross income (MAGI) could push you into a higher Income-Related Monthly Adjustment Amount (IRMAA) bracket, resulting in higher Medicare Part B and Part D premiums.

As you say, it's a debate of risk versus certainty, complicated by higher taxes if you invest.

Don't miss: 'It seems too good to be true': At a steak-dinner retirement seminar, the guy said annuities can outperform the market. Is that true?

By emailing your questions to The Moneyist or posting your dilemmas on The Moneyist Facebook group, you agree to have them published anonymously on MarketWatch.

More columns from Quentin Fottrell:

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'I was shoveling sidewalks at 8 years old': I'm a 73-year-old boomer dad with two kids. Here's what I teach them about finance

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-Quentin Fottrell

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July 08, 2026 10:00 ET (14:00 GMT)

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