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? ›
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.
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.
Does withdrawal from a retirement account count as income? ›
Once you start withdrawing from your traditional 401(k), your withdrawals are usually taxed as ordinary taxable income. That said, you'll report the taxable part of your distribution directly on your Form 1040 for any tax year that you make a distribution.
Do 401k withdrawals count as earned income? ›
The Bottom Line. Withdrawals from 401(k)s are considered income and are generally subject to income tax because contributions and growth were tax-deferred, rather than tax-free.
What kind 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.
Will my Social Security be reduced if I have a 401k? ›
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.
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.
Should you withdraw from your 401k before Social Security? ›
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. However, many people want to (or must) retire before they reach 70.
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.
Do you have to report retirement withdrawal? ›
Regardless of your age, you will need to file a Form 1040 and show the amount of the IRA withdrawal.
At what age is 401k withdrawal tax-free? ›
401(k) withdrawals after age 59½
Once you reach 59½, you can take distributions from your 401(k) plan without being subject to the 10% penalty. However, that doesn't mean there are no consequences. All withdrawals from your 401(k), even those taken after age 59½, are subject to ordinary income taxes.
Does 401k withdrawal count as income for Social Security? ›
Again, Social Security only looks at money that you actually earn from working a job or being self-employed. That means that you could collect Social Security benefits while also taking withdrawals from a 401(k) or individual retirement account (IRA) or receiving payments from an annuity.
Do withdrawals from my IRA affect Social Security benefits? ›
Will withdrawals from my individual retirement account affect my Social Security benefits? Social Security does not count pension payments, annuities, or the interest or dividends from your savings and investments as earnings. They do not lower your Social Security retirement benefits.
Do TSP withdrawals count as income? ›
If you are 591/2 or older, you can make withdrawals from your TSP account while you are still employed . You must pay income tax on the taxable portion of your withdrawal unless you roll it over to an IRA or other eligible employer plan .
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.
Can my pension lower my 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.
Can you collect a pension and Social Security at the same time? ›
Can you collect Social Security and a pension at the same time? You can retire with Social Security and a pension at the same time, but the Social Security Administration (SSA) might reduce your Social Security benefit if your pension is from a job at which you did not pay Social Security taxes on your wages.
