California Doesn't Tax Social Security. That Changes What Waiting Until 70 Is Worth.
Someone is 66, retired or close to it, with a large traditional IRA and a Social Security decision coming up. The usual way to frame that decision is a break-even age: how long you would need to live for a bigger, later check to outpay a smaller, earlier one.
In California, that framing leaves something out. The state taxes the two income sources on either side of the decision very differently.
This article covers how California treats Social Security compared with IRA withdrawals, why that difference changes the choice between claiming at full retirement age and delaying to 70, and what else the decision touches. It applies to California residents born in 1960 or later who hold meaningful pre-tax retirement savings.
The Fork at Full Retirement Age
For anyone born in 1960 or later, full retirement age is 67. Each year you delay claiming past that point adds 8% to your benefit, up to age 70. Waiting the full three years produces a benefit 24% larger than the one available at 67, before cost-of-living adjustments.
As a hypothetical, a benefit of $3,000 a month at 67 becomes $3,720 a month at 70. That is $8,640 more per year for life. The figures are illustrative and ignore annual cost-of-living increases.
The cost of waiting is the three years of checks you don't collect. For most households with savings, that spending gets covered by drawing on something else in the meantime, usually the IRA.
What Each Path Looks Like
Claim at 67. Social Security covers part of spending right away. The IRA stays untouched and keeps growing, which means larger required distributions once they begin at 75.
Delay to 70. For three years, spending comes from IRA withdrawals instead. The IRA is smaller when required distributions begin, and the Social Security check is larger for the rest of your life.
Both paths can be reasonable. Health, family longevity, other income sources, and how much is in the IRA all bear on which one fits. The part that often goes unexamined is what each path does to your California tax return.
What Most People Miss
A break-even calculation treats a dollar of Social Security and a dollar of IRA withdrawal as equal. For a California resident they aren't.
California excludes Social Security benefits from state income entirely. Any amount that is taxable on your federal return is subtracted back out on the California return. IRA withdrawals get no such treatment. They are taxed by California as ordinary income, at rates up to 13.3%.
That turns the delay decision into something more than a bet on longevity. Delaying and drawing on the IRA in the meantime shifts part of your lifetime income away from a source California taxes and toward one it doesn't. The bridge withdrawals are taxable now. The larger check they buy is state-tax-free for as long as it's paid.
Two other effects follow from the same choice:
The survivor. When one spouse dies, the survivor generally keeps the larger of the two Social Security benefits, including any increase earned by delaying. That benefit arrives in the same years the survivor begins filing as a single taxpayer, against narrower brackets. A larger, state-exempt check in those years does more work than it did while both spouses were living.
The bridge years themselves. Drawing on the IRA for three years raises taxable income in those years. That can move federal brackets, and it can move the income Medicare uses to set premiums two years later. The size of those withdrawals is a decision in its own right, not a side effect.
How the Decision Gets Made Well
It gets made across more than one year and more than one return. Comparing the two paths means laying out federal and California taxes side by side for each year: the bridge years, the years before required distributions, the years after, and the years a surviving spouse might file alone.
It also depends on how the bridge is funded. The Bucket Plan® organizes assets by when they will be needed. The three years of spending before a delayed claim are the most clearly dated need in a retirement. Setting that money aside in advance means the plan to delay doesn't depend on selling long-term holdings in a bad year to keep it going.
And it gets made before the claim, not after. A benefit that has already started can be withdrawn only within the first 12 months, and only by repaying what was received.
For anyone already working with an advisor, the useful question is whether the claiming decision was modeled against your California return, or against a break-even age alone.
If you're approaching this decision and would like a second view of how the two paths compare for your household, we'd be glad to talk it through.
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