What impact will a withdrawal on my 401(k) have on my Social Security?
I start collecting Social Security in August. I was wondering if I decided to take a withdrawal from my retirement accounts (401k), will it effect my Social Security income? Would that affect how my Social Security benefits are being taxed? If so, how?
It will not affect the amount you receive in Social Security benefits, but it will affect how much of your benefits are taxed. Your withdrawals from a 401(k) are considered income and are calculated as part of your Modified Adjusted Gross Income (AGI) on your tax return. It can be complicated in determining how much of your Social Security payments are taxable. This is an example of how the calculation works to figure out how much of your Social Security will be taxed.
- Add 50% of your Social Security income to all of your other income. For ex. if you received $20,000 in social security payments you use $10,000. You then add the $10,000 to all of your other income of $25,000 (including retirement plan distributions, non-taxable interest, and pension income) for a total of $35,000 MAGI. Therefore $10,000 of your Social Security will become taxable to you which is 50% of your Social Security payments.
- The amounts below are the determining amounts to see if your Social Security payments are taxable.
- If your MAGI is more than $25,000 and you file as Single or Head-of-Household, then you will pay tax on 50% of your Social Security payments.
- If your MAGI is more than $32,000 and you file as Married Filing Jointly you will, then pay tax on 50% of your Socials Security payments.
- If your MAGI is more than $34,000 and you file as Single or Head of Household, then you will pay tax on 85% of your Social Security payments.
- If your MAGI is more than $44,000 and you file as Married Filing Jointly, you will pay tax on 85% of your Social Security pavements.
You can view more from the following website https://www.ssa.gov/planners/taxes.html
Withdrawals from qualified retirement accounts (such as IRAs, 401(k)s and 403(b)s) are counted as income. Receiving less than $25,000 ($32,000 for joint filers) in combined income means that none of your Social Security benefits are subject to federal income tax. Between $25,000 and $34,000 ($32,000 to $44,000 for joint filers) means up to half of your Social Security benefits will be taxable. Above these amounts, 85% of your Social Security benefits will be taxable. Unfortunately (so far), the thresholds beyond which the first 50% and then 85% of your Social Security benefits are subject to federal income tax are not indexed for inflation. Best of luck!
Your Social Security benefits are taxed based on your total income tax bracket at the time of filing. The first 15% of your Social Security benefit is not taxed. The remainder 85% is taxed just like the rest of your income is taxed. If you withdraw from your 401(k) and have Social Security income, you will be taxed just like you have been in the past. Your adjusted gross income will include the 85% Social Security income plus whatever you withdraw from your 401(k). The amount of tax you pay will be based on your deductions that the government gives us.
For example, if your Social Security payment is $20,000 (85% of $20,000 is $17,000) a year and you withdraw $20,000 from your 401(k), you will be taxed on $37,000 just as though you had earned it. The tax you pay will be based on your deductions that the IRS gives.
Your withdrawal from the 401k and IRA will not impact your social security income, but it will affect how your social security income being taxed.
Because the 401k and traditional IRA are funded with the pre-tax money, when you take them out, you will need to pay ordinary income tax on it. When that happens, it will cause your AGI increases, and guess what else? It may cause your social security benefit to be taxed too. How?
When your provisional income exceeds the thresholds, up to 85% of social security benefits may be subject to tax. Provisional income is equal to AGI plus ½ of the social security income, plus other non-taxable interest (such as interest on tax-exempt bonds). Surprised by the last statement? The benefits of the muni may not help you during the retirement; it may actually jeopardize your income as in this case. You may want to talk to a CFP® or a RICP® for some investment review and better retirement income suggestions.
The threshold for social security benefits being taxed are (assuming you’re single): 1) If you have $25k or less provisional income, your social security benefit is safe. 2) If your provisional income is between $25k to $34k, up to 50% of your social security benefit is being taxed. 3) If your provisional income is above $34k, up to 85% of your social security benefit is being taxed.
Now, you see how your withdrawal from the 401k/IRA will impact your social security benefit being taxed. It may not be too late to work with a professional to see what other strategies for you to minimize that chance. Best!
The withdrawal from your 401(k) may not have an effect on the amount of Social Security income that you are receiving. However, the withdrawal from the 401(k) could impact how your Social Security benefits are taxed.
Generally speaking, some people (not all) have to pay federal income taxes on their Social Security benefits. This normally happens only if they have substantial other income (wages, dividends, interest, withdrawals from retirement plans, etc.) that is reported as taxable income on their income tax return.
Basically, here is how you determine if your 401(k) withdrawal will cause your Social Security benefits to become taxable, calculate your adjusted gross income (not including Social Security, but including the 401(k) withdrawal) plus 50% of your benefits plus any tax-free interest. If the total is between $25,000 and $34,000 on single filing status tax return or between $32,000 and $44,000 on a joint filing status tax return, then up to 50% of your Social Security benefits can be taxed. The rest is tax-free. If your total exceeds $34,000 for single or $44,000 for joint return, it's likely that 85% of your Social Security benefits will be taxed. The maximum amount of benefits subject to income taxes if 85%. If your totals fall below the $25,000 (single) and $44,000 (joint), then your benefits could be tax-free.
Hope that this helps.