Why and how to avoid income lumps

Tuesday, June 20th, 2006
Categorized as: Savings Bond taxes

In his column for June 14, Learning to avoid ‘taxable events’, Scott Burns of the Dallas Morning News answers two questions about avoiding lumps of income that will push you into a higher tax bracket.

What causes income lumps is taking lots of money out of tax-deferred accounts, such as Savings Bonds, traditional IRAs, or 401Ks in one year. Burns recommends diversifying your money between tax-deferred and taxable accounts to avoid this.

To create this diversity, you may have to move a little money every year out of the tax-deferred accounts into the taxable accounts.

Burns says:

The majority of Americans don’t face high taxes. A couple filing a joint return, for instance, can have a taxable income of $61,300 this year before they leave the 15 percent tax bracket. Since the same couple would have $6,600 in personal exemptions, a standard deduction of $10,300, and another $2,000 deduction if elderly, a couple can have a gross income of $80,200 before entering the 25 percent tax bracket. (For a single elderly person, the comparable figure is $40,350.)…

A single person with an average Social Security benefit of about $1,000 a month can have other income up to $19,000. Additional income over that amount will cause a portion of Social Security benefits to be added to their income and taxed.

So if you make a large IRA withdrawal for a purchase, redeem a large amount of I Savings Bonds, or make a large withdrawal from a tax-deferred annuity, you’ll pay taxes not only on the taxable amount of the withdrawal, but also on a portion of your Social Security benefits.

The only way to avoid this nasty event is to talk with your accountant and “walk the line” on your income, trying to avoid triggering this additional taxation.

How do you do that?

First, you avoid big lumps of income. That means making withdrawals gradually….

Rate this post (1 to 5 stars):  1 Star2 Stars3 Stars4 Stars5 Stars
(Average rating: 4.14 stars)

FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:


On June 20th, 2006 Charles said:

Hi Tom,
According to the Social Security page at http://www.ssa.gov/pubs/10069.html, there is no reduction of benefits on interest earnings, which I assume Savings Bonds would fall under – unless I am reading it wrong, which isnt very difficult to do on a govt web site 🙂

Also the earning limit looks off. Am I missing something?

i.e. If you work for someone else, only your wages count toward Social Security?s earnings limits. If you are self-employed, we count only your net earnings from self-employment. We do not count income such as other government benefits, investment earnings, interest, pensions, annuities and capital gains.

On June 20th, 2006 Charles said:

Never mind, I did read it wrong. I had reduction in SS benefits on my mind. Which is something else you can add to the illusion of SS on top of taxes.

On June 20th, 2006 Tom Adams said:

Charles – you are correct. In some cases your SS benefits will be reduced if you have wages or self-employment income over a certain amount.

But as you now realize, this article is about something different – SS benefits being taxed (not reduced) when your income level rises above a certain amount. While working can cause this, too, so can moving money out of tax-deferred accounts.

Looking at it the other way, moving money out of tax-deferred accounts will never reduce your benefit, but above certain levels it causes your benefits to be taxed.

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

Savings Bond Calculator


Savings Bond

Get an answer to your questions from the Treasury's Savings Bonds team.

Click below to ask a question.

Ask the Treasury


Invest online in Savings Bonds or
marketable Treasury securities.

Deal directly with the U.S. Treasury.

More info


Log in