Will the New Social Security Tax Deferral Affect Your Retirement?

September 3, 2020 12:20 PM
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On August 8th, President Trump issued 4 executive orders, one of which allows employees to defer their Social Security taxes between September and December 2020. Let’s break down what this means.

Every pay period, 6.2% of your pay is withheld and sent straight to the IRS to fund Social Security. This executive order will allow employees to defer the 6.2% that would be due between September and December of this year. In practice, this means that employees can see a bump in the paychecks during those 4 months.

But as you might have noticed, this executive order does not forgive the taxes but only defers them. This means that any amount that isn’t withheld between September and December will be withheld between January and April 2021, so any extra that you might see in your paycheck over the next 4 months will simply come out of your pay early next year. It is far from free money and basically an interest free loan.

Now, with all this being said, it is still very unclear how all of this will actually be applied. Many federal agencies have suggested that all their employees will participate without the ability to opt out, but because this is all happening so quickly, we don’t know exactly how all this is going to work. In the end, some agencies may choose not to participate at all. We should know more in the coming weeks.

What Does This Mean For My Retirement?

One federal employee asked an important question, “How does all this affect my retirement and Social Security benefits? And what if I am planning to retire at the end of this year before the deferred Social Security withdrawals are paid back? Are my Social Security benefits going to be decreased?”

Great question. Like I said before, we don’t have all the answers, but the IRS has suggested that even if someone quits or retires at the end of this year, they will still have to pay the owed Social Security taxes. This may be due by April 15th with your tax return or may come out of your retirement pension.

As of now, we don’t know exactly, but odds are it will have to be paid somehow. If your paychecks are increased because of this deferral, I would be careful not to spend the extra amount so that you are prepared to pay it next year.

I would be very surprised if someone’s Social Security benefits were decreased because they happened to retire at the end of a year when Social Security taxes were deferred. Odds are, benefits will be calculated as if all taxes were paid on time. This seems to be the most fair and administratively convenient option, but again, this is only my opinion so we’ll have to wait and see how this all actually works at the end of the day. 

Conclusion

This executive order is another reminder to have some wiggle room in your retirement plans. In the end, it may not affect your retirement plans at all but it just might. 

When planning for anything (especially retirement), it is important to have a nice margin of error. That way, when things change (and things always do), you are prepared to pivot and won’t be stretched beyond your limits.

© 2020 Dallen Haws. All rights reserved. This article may not be reproduced without express written consent from Dallen Haws.

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About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at PlanYourFederalBenefits.com.

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