A source of income on which many Americans rely might not be providing the payday that some expect. Social Security benefits can open individuals or couples up to tax exposure they might not have anticipated.

The burden can be minimized if you know how to work with your assets to create the best tax scenario for yourself and/or your spouse, according to a new article from Forbes.

The first step is understanding how your taxes are calculated. According to the article:

Social Security benefit taxes are based on what is commonly referred to as your “provisional income.” That includes half your Social Security income for the year, plus your modified adjusted gross income, which includes (among other items) any tax-exempt income. (Tax-exempt income includes interest from municipal bonds — often a core component of retirement portfolios.) After you cross these income thresholds, a portion of your Social Security benefits will be considered taxable income.

Married couples filing jointly: if your provisional income is at least $44,000, your benefits could take an 85 percent tax hit.

Finding ways to lower your provisional income in the eyes of the IRS can help reduce Uncle Sam’s take. Among the suggestions offered is making use of your Roth IRA. Withdrawals from a Roth IRA generally do not count toward the calculation of your provisional income.

In addition, retirees who want to supplement their Social Security with additional income through investments could use a Roth IRA to their advantage because investment income that goes back into the account is not taxed. And when the account is a self-directed IRA, income can come from the returns on a range of investments – including real estate, promissory notes, tax liens, and much more – not just the stock market.

Not sure where to start? Tune in to a free beginner’s webinar October 13 at 9 p.m. to find out more about how self-directed IRAs can help ease your tax burden.

Filed under: Roth IRA, self directed IRA on October 13th, 2011