Gearing up to tap your IRA or 401(k)? Here's what you need to know about your Social Security income.
Many people work really hard to amass savings for retirement. So if you have a nice pile of cash in your IRA or 401(k), you may be hesitant to start tapping it right away. After all, you want that money to last.
Still, the whole purpose of saving in an IRA or 401(k) is to be able to cover your living expenses in retirement without worry -- and perhaps, ideally, have money left over to pay for leisure, travel, and other fun things. So at some point, you're apt to want to start taking withdrawals from your retirement account.
In fact, if you have your money in a traditional IRA or 401(k), as opposed to a Roth savings plan, you'll actually have to start tapping your account once required minimum distributions begin to apply.
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But what if you're receiving monthly benefits from Social Security? Will the money you take out of your IRA or 401(k) affect those benefits?
Your withdrawals won't shrink your benefits
If you earn money from a job and collect Social Security at the same time before reaching full retirement age, you may have some of your Social Security income withheld if your wages exceed the earnings-test limit. But withdrawals from an IRA or 401(k) aren't the same as wages from a job. So distributions taken from a retirement plan won't cause your Social Security benefits to shrink or be withheld.
However, that doesn't mean your retirement plan withdrawals won't affect your Social Security benefits at all. Social Security income has the potential to be taxable at the federal level. And your total income will determine whether federal taxes on your benefits apply.
If you start taking money out of your IRA or 401(k), that will count as taxable income if you have a traditional retirement plan. With a Roth, it won't. So if your retirement plan withdrawals cause enough of an increase to your income, it could result in you having to pay taxes on some of your Social Security benefits.
To be clear, taxes on Social Security benefits could apply even if you're not yet tapping your IRA or 401(k). It may be that you have another income source at your disposal, whether it's a job or a home you rent out. But either way, the more income you have, the greater your chances of being taxed on some of your Social Security. So if you start taking withdrawals from a traditional retirement plan, that could be just the thing that puts you over the threshold where those taxes start to apply.
Know the rules and time your withdrawals strategically
Many people are eager to get out of paying taxes on their Social Security benefits. A good way to potentially do that is to house your retirement savings in a Roth IRA or 401(k).
However, if you're already retired and have a traditional retirement plan, timing your withdrawals strategically could help you avoid taxes on your Social Security -- if not entirely, then to some degree. For example, if you're young enough that you don't have to take RMDs, and you're looking to remove $10,000 from your IRA later this year to pay for a big trip, you could potentially try to take half of your withdrawal in 2024 and the other half in 2025 to minimize your income for each tax year.
Of course, if you're really worried about the tax implications of tapping your retirement savings, consulting an accountant would be a smart bet. But either way, know that you won't be penalized in the form of a lower Social Security benefit, or withheld benefits, if you tap the savings you worked hard to build.
FAQs
Your withdrawals won't shrink your benefits
Will my retirement fund withdrawals affect my Social Security benefits? ›
Not only are withdrawals potentially tax-free,2 they won't impact the taxation of your Social Security benefit.
Does 401k withdrawal count as income? ›
An early withdrawal from a 401(k) plan typically counts as taxable income. You'll also have to pay a 10% penalty on the amount withdrawn if you're under the age of 59½.
What type of income reduces Social Security benefits? ›
When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net earnings if you're self-employed. We include bonuses, commissions, and vacation pay.
What income does not count against Social Security? ›
For the earnings limits, we don't count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains.
How much will my Social Security be reduced if I have a pension? ›
How much will my Social Security benefits be reduced? We'll reduce your Social Security benefits by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits.
What types of pensions affect Social Security benefits? ›
Your Social Security benefit might be reduced if you get a pension from an employer who wasn't required to withhold Social Security taxes. This reduction is called the “Windfall Elimination Provision” (WEP). It most commonly affects government work or work in other countries.
Do IRA withdrawals count as income for Social Security? ›
The quick answer is, “No.” While the ability to collect Social Security benefits may be restricted based on earned income and the SSA's “Earnings Test,” the SSA does not consider IRA distributions as earned income for this purpose.
How do I avoid 20% tax on my 401k withdrawal? ›
Plan before you retire
- Convert to a Roth 401(k)
- Consider a direct rollover when you change jobs.
- Avoid early withdrawals.
- Plan a mix of retirement income.
- Take your RMD each year ...
- But make sure you only take one RMD per tax year.
- Keep an eye on your tax bracket.
- Work with a pro to minimize your 401(k) taxes.
SSDI payments are not affected by having a house, a car, money in the bank, or owning other possessions. On the other hand, many SSI clients are surprised to learn that assets do affect their benefits.
Social Security tax FAQs
Social Security income can be taxable no matter how old you are. It all depends on whether your total combined income exceeds a certain level set for your filing status. You may have heard that Social Security income is not taxed after age 70; this is false.
What is the Social Security 5 year rule? ›
• If you become disabled before your full retirement age, you might qualify for Social Security disability benefits. You must have worked and paid Social Security taxes in five of the last 10 years.
What can offset Social Security benefits? ›
Government pension offset
That is, if you worked in jobs for which no Social Security taxes were withheld and then claim benefits on your spouse's or former spouse's record, you may receive reduced Social Security benefits—or none at all.
Does 401k withdrawal affect Social Security? ›
But withdrawals from an IRA or 401(k) aren't the same as wages from a job. So distributions taken from a retirement plan won't cause your Social Security benefits to shrink or be withheld.
What income is not counted? ›
Earned income also includes net earnings from self-employment. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, worker's compensation benefits, or social security benefits.
How much money can I make without affecting my Social Security? ›
If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2024, that limit is $22,320. In the year you reach full retirement age, we deduct $1 in benefits for every $3 you earn above a different limit.
Does Social Security count retirement funds as income? ›
Pension payments, annuities, and the interest or dividends from your savings and investments are not earnings for Social Security purposes. You may need to pay income tax, but you do not pay Social Security taxes.
Are 401k withdrawals taxed for Social Security? ›
The good news is that you will only have to pay income tax. Those FICA taxes (for Social Security and Medicare) only apply during your working years. You will have already paid those when you contributed to a 401(k) so you don't have to pay them when you withdraw money later.
Should I withdraw from my 401k before Social Security? ›
Using Your 401(k) to Delay Getting Social Security and Increase Payments. Your 401(k) can be a bridge from retirement to higher monthly income. Although you can start collecting Social Security at age 62, you can get much higher monthly payments if you wait as long as age 70.
Do 401k contributions reduce Social Security benefits? ›
Again, it's important to remember that your 401(k) plan is an entirely separate thing from Social Security. Your 401(k) is offered by your employer while Social Security comes from the government. So making contributions to a 401(k) will not reduce your Social Security benefits in any way.
