67-Year-Old Costs Himself $1,315 A Year In Taxes Using A Treasury Fund To Add $1,000 A Month In Income To His Social Security And Pension. If He’d Used SCHD Instead His Tax Bill Would Be Reduced By Over 60%
A retired man collects Social Security and a pension, adds $1,000 a month from a popular Treasury fund, and ends up handing the IRS a bill he never needed to pay. The fund type is the culprit, and the fix…
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
Two retirees each pull an extra $1,000 a month from their investments. One owes more than the other each year. He sends the IRS roughly $1,315 extra, and the only difference is the type of income his fund pays.
This is an hypothetical example.
A 67-Year-Old With Two Income Streams and a Gap to Fill
He is a single filer, age 67, collecting $26,400 a year in Social Security (roughly $2,200 a month) and an $18,000 pension (roughly $1,500 a month). He wants $12,000 a year more from his portfolio.
His 2026 standard deduction is $24,150. It includes a $16,100 base for single filers, a $2,050 age-based addition, and the $6,000 senior bonus deduction created by the One Big Beautiful Bill Act. That bonus phases out at $75,000 of income for a single filer.
Why Both Funds Trigger the Same Social Security Tax
Most retirees assume fund choice changes how much of their Social Security gets taxed. In this scenario, it doesn’t.
The IRS uses provisional income to decide how much of your benefit is taxable. It combines your other income with half of your Social Security; the higher that total, the more of your benefit becomes taxable. The single-filer thresholds under Internal Revenue Code section 86 are $25,000 and $34,000. They are not indexed to inflation.
Treasury interest and qualified dividends count equally toward provisional income. In both scenarios, exactly $12,320 of his Social Security is taxable, and his total taxable income lands at $18,170 either way.
Two different funds, the same Social Security tax hit, the same taxable income, and the gap between his two bills comes entirely from how the $12,000 itself is taxed.
Where $1,315 a Year Actually Comes From
Interest from the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is fully ordinary income under 2026 brackets, producing $1,932.40 in total federal tax.
Qualified dividends get their own rate schedule. The 2026 single-filer cap for the 0% qualified dividend rate is $49,450. His taxable income stays well under it. The entire $12,000 from the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is taxed at 0%.
His total federal bill is $617.00, owed on the taxable portion of his Social Security and pension. The difference is $1,315.40 a year, a reduction of over 60%.
What Each Fund Holds and Pays
TLT pays monthly, 12 times a year. Its latest distribution was $0.314686 per share, ex-dividend September 1, 2026, with trailing twelve-month distributions of $3.890247 and a forward annualized figure of $3.776232. Its yield is approximately 4.8%. Its expense ratio is 0.15% per its prospectus dated June 29, 2026. Ordinary income treatment is standard for Treasury interest at any amount.
SCHD pays quarterly, 4 times a year. Its latest distribution was $0.2665 per share, ex-dividend September 23, 2026, with trailing distributions of $1.0541 and a forward annualized figure of $1.066. It excludes REITs, MLPs and BDCs by design, and 95% to 100% of its distributions are qualified.
Its SEC portfolio filing as of May 31, 2026 shows roughly $95 billion in net assets. Top positions were QUALCOMM (NASDAQ:QCOM | QCOM Price Prediction) near 7%, Texas Instruments (NASDAQ:TXN) near 6% and UnitedHealth Group (NYSE:UNH) near 5%.
Switching Funds Means Swapping Risks
TLT is a long-duration Treasury fund whose main risk is interest rate sensitivity. SCHD owns common stock. A retiree who moves from one to the other has changed what he owns, traded government credit for equity risk, and exposed his principal to stock market drops and dividend cuts.
The tax mechanism is genuine, but avoid treating a Treasury-to-stock swap as a free $1,315. Among several IRS rules that quietly change a retiree’s tax bill, we mapped out the rest in a free guide. The funds serve different purposes, and the tax difference is one factor among several, rarely the deciding one.
Two Caveats Before You Run Your Own Numbers
This covers federal tax only. Treasury interest is exempt from state and local income tax. SCHD’s dividends are taxable at the state level, and some states tax qualified dividends equally to ordinary income. That can narrow the gap.
This shows a mechanism and is no substitute for tax advice. Your brackets, state and income mix will produce different numbers, and a tax professional can model them before any change. Start by checking where your taxable income sits relative to that $49,450 cap, and drop the assumption that dividends shield your Social Security.
Contact [email protected] for any questions or corrections.
AJ spent 10 years writing about financial markets at The Motley Fool. His coverage centers on technology stocks and the broader macroeconomic trends, from interest rates to geopolitics, that shape where markets are headed next. AJ is drawn to the stories where big-picture economics and individual companies collide.
