Retirees Who Delay Social Security Get One Hidden Advantage

Most people already know that waiting to receive their Social Security benefits results in a larger monthly benefit payment. This delayed retirement approach can increase benefits by up to 8% per year between full retirement age (FRA) and age 70, depending on your birth year and when you claim. In many cases, delaying from FRA to age 70 can result in a roughly 24% to 32% higher benefit.

But the hidden advantage here isn't the larger check. While that's certainly nice, retirees also have the chance to capitalize on the low-income gap years before the benefits start. These years create room to make the right moves and stretch benefits further when you do take them.

How delaying Social Security works

Full retirement age is the age when you qualify for 100% of your primary benefit amount, usually between 66 and 67. Claiming before this time permanently reduces the benefit, but delaying past this amount earns delayed retirement credits (DRCs) that boost the monthly benefit. After age 70, there's no further increase, so there's no real benefit to waiting past this time.

The tables on the Social Security website give concrete examples of this; choose your birth year, such as 1957, to compare benefit amounts under different retirement ages.

What the gap years do for your retirement

Those years between when someone stops full-time work and when they collect Social Security benefits are often called the "gap years." They tend to be one of the lowest-income periods of someone's adult life, since regular wages may stop and Social Security hasn't started. Withdrawals from savings can also be dialed up or down.

Tax brackets are applied annually, so these low-income years create room to recognize more income at relatively low marginal rates. Smart moves during this time period can permanently reshape how much the IRS and Medicare collect from you in later retirement.

Use the window for Roth conversions

One of these smart moves is to move money from a pre-tax account, like a traditional IRA, into a Roth account. Yes, you'll pay tax now, but your gap years' income may be low enough that you can do this while staying in a relatively low tax bracket. Later in retirement, when you take withdrawals from the Roth, the taxes will have already been paid, and you will benefit from tax-free status if certain rules are met.

You can essentially "fill up" lower tax brackets with Roth conversions, paying tax at a possibly lower rate than when you have to take required minimum distributions (RMDs). This strategy may save you tax money in the long run, but it also gives you more control over how you're taxed.

Manage IRMAA and Medicare premium surprises

The Income-Related Monthly Adjustment Amount (IRMAA) is the surcharge added to a senior's Medicare Part B and Part D premiums after income exceeds certain thresholds. It kicks in based on the modified adjusted gross income (MAGI) from previous years' tax returns.

However, delaying Social Security can help, because the gap years give retirees a chance to plan Roth conversions and capital gains to stay below those IRMAA tiers and still take advantage of low brackets. It's a win-win that makes these gap years so valuable. Because once Social Security benefits and RMDs begin, MAGI almost always goes up. At that point, it's rather difficult to avoid IRMAA.

Reduce future Social Security taxation

Depending on provisional income, an amount that includes half of Social Security plus other income like wages, pension, and IRA withdrawals, up to 85% of Social Security benefits can be taxable. Higher pre-tax withdrawals or RMDs later in retirement can push more of a Social Security payment into this taxable bucket.

But converting pre-tax assets to Roth during those gap years essentially reduces the size of future RMDs and taxable withdrawals, so provisional income may be lower. It could potentially reduce how much of your Social Security gets taxed each year later on. The hidden gap year advantage gives you time to reshape your future income mix to better manage your tax exposure.

Bottom line

Delaying Social Security gives you an 8%-per-year benefit increase, but that's not the whole story. You can also take advantage of the hidden advantage found in the pre-benefit gap years. Use this time to lower lifetime taxes, manage IRMAA, and reshape retirement income. Taken together, delaying and smart gap-year tax planning can give your nest egg a meaningful boost.

If you're unsure how much to move where (and when), sketch out a gap-year tax plan before you file for benefits, or between 5-10 years ahead of retirement. Map out expected income by year, plan targeted Roth conversions, and model IRMAA thresholds and projected RMDs.

Use these numbers to see the value of delayed senior benefits in clear terms, and schedule a meeting with a financial advisor if you're unsure how to maximize your timeline for the best tax results.