What Is the Social Security Tax Torpedo?
The “tax torpedo” refers to a quirk in the tax code where an additional dollar of income can cause a disproportionately large jump in the amount of Social Security benefits subject to taxation. Under IRC §86, up to 85% of your Social Security benefits can become taxable based on your “provisional income.”
This means that a seemingly small increase in retirement withdrawals — from an IRA, 401(k), or other source — can trigger a cascade of additional taxes. The effect is especially pronounced for retirees with moderate incomes.
How an Annuity Can Help
Certain types of annuities — particularly Roth conversions funded through annuity strategies — can help manage provisional income and potentially reduce the tax torpedo’s impact. A qualified advisor can model your specific situation.