How Social Security Benefits and IRA Withdrawals Interact With Taxes

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

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The distributions you receive from an individual retirement account (IRA) or 401(k) fund don't affect how much you're entitled to receive in Social Security benefits each month, but they can affect the taxes you pay. The Internal Revenue Service (IRS) requires that you pay taxes on some of those benefits if your retirement withdrawals increase your overall "combined" income past a certain limit.

Even if you have to pay taxes on your Social Security benefits, you won't pay them on 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 Pay Taxes on Your Benefits

According to the IRS, you would have to pay taxes on your Social Security benefits if your combined income is more than the base amount for your filing status. This base amount can vary from year to year. Your combined income is calculated by adding one half of the total of your benefits to all your other income, including tax-exempt interest.

As an example, you might have received $17,000 in Social Security benefits in 2020, which would be reported on the tax return you file in 2021. You also continued working part time, and you had $12,000 in earned income. Your IRA produced $5,000 in tax-exempt income. You therefore had a total income of $34,000.

This is more than the combined income base amount for your filing status if you're single, which is $25,000 as of the 2020 tax year. You would owe income tax on a portion of your benefits.

This tax of Social Security benefits is not a decrease in long-term benefits.

The income base shouldn't be confused with the earnings limit. You might owe some of your Social Security benefits back to the government if you're collecting Social Security before you reach your full retirement age, and you have too much earned income.

Combined Income Base Amounts in 2020

Single filers with combined incomes of less than $25,000 will not pay taxes on Social Security benefits as of tax year 2020.

  • Those with combined incomes between $25,000 and $34,000 will pay taxes on up to 50% of their benefits.
  • 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 file joint tax returns. You must add together the income of both spouses, even if one of you isn't receiving Social Security benefits. Couples with combined incomes of less than $32,000 won't pay taxes on Social Security benefits.

  • Those with combined incomes between $32,000 and $44,000 will pay taxes on up to 50% of their benefits.
  • Those making more than $44,000 will pay taxes on up to 85% of their benefits.

Taxation and Roth IRAs

These rules apply to income earned from traditional IRAs and 401(k) plans, but not from Roth IRAs. You pay taxes on the money you contribute to a Roth IRA at the time you make those contributions, so you don't pay any on withdrawal.

Roth IRA withdrawals don't raise your combined income, and they won't increase your chance of paying taxes on your Social Security benefits.

Another benefit of a Roth IRA is that there's no set schedule for withdrawing your money as required minimum distributions. Traditional IRAs and 401(k) plans require that you begin withdrawals after you reach the age of 70½ if you attained this age before January 1, 2020. Otherwise, you have until age 72. 

It's worth talking to your financial advisor to find out if a Roth IRA is right for you given your personal financial circumstances, particularly if you're concerned about the burden of taxes after your retirement.

NOTE: 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.