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.
