Social Security provides a guaranteed source of income in retirement, but what many don't realize is that you're not guaranteed to keep it all. Some retirees owe taxes on their Social Security benefits, but it all depends on your income. Here's a closer look at how your retirement fund withdrawals play into all of this.
It's all about combined income
Your combined income determines whether you owe taxes on your Social Security benefits. This is defined as your adjusted gross income (AGI) plus nontaxable interest plus half of your annual Social Security benefits.
Image source: Getty Images.
Your AGI is your income for the year minus certain tax deductions, like self-employment taxes and contributions to tax-deferred retirement accounts. Money you withdraw from tax-deferred retirement accounts, like most 401(k)s and traditional IRAs, does count toward your AGI, but Roth retirement account withdrawals do not. You already paid taxes on your initial contributions to these accounts and the money grows tax-free afterward. You shouldn't have to worry about nontaxable interest in your combined income calculation unless you have tax-exempt bond funds in your portfolio.
So a single individual with an AGI of $20,000 with $1,000 in non-taxable interest and a $12,000 annual Social Security benefit would have a combined income of $27,000 ($20,000 + $1,000 + $6,000 = $27,000).
Single adults with a combined income exceeding $25,000 and married couples filing jointly with a combined income exceeding $32,000 could pay taxes on up to 50% of their Social Security benefits. Single adults with a combined income greater than $34,000 and married couples filing jointly with a combined income greater than $44,000 could owe taxes on up to 85% of their benefits.
But just because you could owe taxes on 50% or 85% of your benefits doesn't mean you'll actually pay this much. The Social Security benefit tax formula is beyond the scope of this article, but here's a more detailed guide explaining how it works. You can use these formulas to calculate how much you'll actually owe.
How to avoid Social Security benefit taxes
Most retirees' only sources of income are Social Security and withdrawals from their retirement accounts. Being smart with your retirement account withdrawals can reduce your odds of owing taxes on your Social Security benefits. If you know you're approaching one of the taxation thresholds mentioned above, try to avoid withdrawing more money from your tax-deferred retirement accounts for the rest of the year. You can live off of Roth retirement savings if you have any, because these don't affect your tax bill at all. Or you can just cut back your spending temporarily. Think carefully before doing this, though. Avoiding Social Security benefit tax may not be worth penny-pinching for several months. You might just be better off paying the taxes and spending your money as you choose.
Delaying Social Security benefits could also help reduce your risk of owing taxes on your benefits. The soonest you can sign up for Social Security is 62, but you must wait to claim benefits until your full retirement age (FRA) if you want your full scheduled benefit based on your work record. Starting early will cost you. You'll only get 70% of your scheduled benefit per check if you begin benefits at 62 and have an FRA of 67 or 75% if your FRA is 66. You can also delay benefits past your FRA and your checks will keep increasing until you reach the maximum benefit at 70. This is 124% of your scheduled benefit per check if your FRA is 67 or 132% if your FRA is 66.
You can't owe taxes on Social Security benefits if you're not receiving any. Delaying benefits until your FRA or beyond will increase the size of your checks so that they'll go further in retirement. This helps reduce how much you must withdraw from your retirement savings each month, which will in turn lower your AGI. Only half of your Social Security benefits count toward your combined income calculation, so while larger checks will increase your combined income somewhat, your lower AGI will partially or completely counteract this.
You might not be able to get around Social Security benefit taxes and still make ends meet. But it still pays to understand how all of this works so that you don't run into any surprises come tax time. If you're not retired or claiming Social Security benefits yet, start planning out when you're going to start Social Security and consider stashing some money in Roth accounts to reduce your risk of Social Security benefit taxes when you are ready to retire.
FAQs
Your withdrawals won't shrink your benefits
Will my retirement fund withdrawals affect my Social Security benefits? ›
Income that you receive from your 401(k) or other qualified retirement plan doesn't affect the amount of the Social Security retirement benefit you receive each month but you may be required to pay taxes on some of your benefits.
Do 401k withdrawals count against Social Security earnings limit? ›
"A Roth IRA or Roth 401(k) can help you save on taxes in retirement. Not only are withdrawals potentially tax-free,2 they won't impact the taxation of your Social Security benefit.
Do IRA withdrawals count as income for Social Security? ›
If you withdraw money from a traditional IRA, it won't affect your ability to claim and collect Social Security benefits. However, a traditional IRA distribution is considered taxable income, and can result in some of your Social Security benefits being subject to income tax.
Does retirement income reduce Social Security benefits? ›
Any earnings after you reach your full retirement age won't reduce your benefits. Learn more at www.ssa.gov/pubs/EN-05-10069.pdf. Your earnings can increase your monthly benefit amount — even after you start receiving benefits.
Do retirement withdrawals count as income? ›
You can take distributions from your IRA (including your SEP-IRA or SIMPLE-IRA) at any time. There is no need to show a hardship to take a distribution. However, your distribution will be includible in your taxable income and it may be subject to a 10% additional tax if you're under age 59 1/2.
Do I have to report 401k withdrawal to Social Security? ›
The short answer is no, taking a distribution from your 401(k) does not impact your eligibility for (or the amount of) your Social Security benefits. Since a 401(k) comes from an employer and Social Security comes from the government, these two sources of income are completely separate.
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.
At what age is Social Security no longer taxed? ›
There is no age at which you will no longer be taxed on Social Security payments. So, if those payments when combined with your other forms of income, exceed one of the two thresholds, then you will have to pay at least federal taxes on either 50% or 85% of the benefits you receive.
What types of pensions affect Social Security benefits? ›
Your benefit might be reduced if you get a pension from a government employer who wasn't required to withhold Social Security taxes. This reduction is called the “Government Pension Offset” (GPO).
To be eligible for SSI, your assets must be less than $2,000 for an individual and less than $3,000 for a married couple. However, not all assets count towards the resource limits. The Social Security Administration lists 44 resource exclusions.
Can you collect a pension and Social Security at the same time? ›
When you retire, you'll get your public pension, but don't count on getting your full Social Security benefit. Under federal law, any Social Security benefits you earned will be reduced if you were a federal, state or local government employee who earned a pension on wages that Social Security did not cover.
What counts as income for Social Security? ›
Only earned income, your wages, or net income from self-employment is covered by Social Security. If money was withheld from your wages for “Social Security” or “FICA,” your wages are covered by Social Security.
Do 401k withdrawals count against Social Security? ›
But your 401(k) withdrawals will not affect your gross Social Security payments. Depending on the amount of your 401(k) withdrawals, some of the Social Security benefits received during the 2024 tax year will likely be subject to income tax.
What is the 5 year rule for Social Security? ›
You must have worked and paid Social Security taxes in five of the last 10 years. If you also get a pension from a job where you didn't pay Social Security taxes (e.g., a civil service or teacher's pension), your Social Security benefit might be reduced.
What can cause you to lose your Social Security retirement benefits? ›
Social Security: 4 Ways You Can Lose Your Benefits
- You Forfeit Up To 30% of Your Benefits by Claiming Early. ...
- You'll Get Less If You Claim Early and Earn Too Much Money. ...
- The SSA Suspends Payments If You Go To Jail or Prison. ...
- You Can Lose Some of Your Benefits to Taxes. ...
- You Can Lose SSDI in a Few Different Ways.
If you work for an employerwho doesn't withhold Social Security taxesfrom your salary, such as a government agency, any pension you get from that work can reduce your Social Security benefits. Not every public agency participates in Social Security, so coverage is for employees is not automatic.
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.
