How Social Security Taxes Interact with 401(k) or IRA Withdrawals

An IRA or 401(k) withdrawal may mean paying taxes on your benefits

Golden savings, 401K, 529, social security, and cracked tax eggs in egg holders, depicting how Social Security taxes can affect 401(k) or IRA withdrawals
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The distributions you receive from an individual retirement account (IRA) or 401(k) fund don't change the amount of Social Security benefits you receive each month. However, they can affect the taxes you pay. That's because the Internal Revenue Service (IRS) requires you to pay taxes on some of those Social Security benefits if your retirement withdrawals make your income rise past a certain amount.

Even though you may have to pay taxes on your Social Security benefits, you won't have to pay them for the full benefit amount. The IRS taxes only 50% to 85% of your benefits, depending on how much-combined income you bring in.

When You'll Need to Pay Taxes on Social Security Benefits

According to the Internal Revenue Service (IRS), you may need to pay taxes on your Social Security benefits if your combined income is more than the base amount for your filing status, which varies from year to year. Generally, your combined income is the total of half of your benefits and all of your other income, including tax-exempt interest.

As of 2020, single filers with a combined income of less than $25,000 will not pay taxes on Social Security benefits. Those with a combined income between $25,000 and $34,000 will pay taxes on up to 50% of their benefits, and those making more than $34,000 will pay taxes on up to 85% of their benefits.

It works a bit differently for married couples who are filing jointly. You must add together the income of both spouses even if one of you isn't receiving Social Security benefits. Couples with a combined income of less than $32,000 will not pay taxes on Social Security benefits. Those with a combined income between $32,000 and $44,000 will pay taxes on up to 50% of their benefits, and those making more than $44,000 will pay taxes on up to 85% of their benefits.

This tax of Social Security benefits is not a decrease in long-term benefits. It's also not to be confused with the earnings limit: If you are collecting Social Security before you reach your full retirement age, and you have too much-earned income, then you may owe some of your Social Security benefits back to the government.

Taxation and Roth IRAs

All of this applies to income earned from traditional IRAs and 401(k) plans—not Roth IRAs. That's because you pay taxes on the money you contribute to a Roth IRA, and you don't pay any on withdrawal. This means Roth IRA withdrawals don't won't raise your combined income, and thus won't increase your chance of paying taxes on your Social Security benefits.

If you're concerned about the burden of taxes after your retirement, then it's worth talking to your financial advisor to find out if a Roth IRA is right for you. Another benefit of Roth IRAs is that there's no set schedule for withdrawing your money. Traditional IRAs and 401(k) plans require you to begin withdrawals after you reach the age of 70.5.

 The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.