How Social Security Benefits and IRA Withdrawals Interact With Taxes

Do you receive distributions from an individual retirement account (IRA) or 401(k)? If so, you'll be happy to know that those funds won't affect how much you're able to receive in Social Security benefits each month. However, they can affect the taxes you pay.

The Internal Revenue Service (IRS) requires that you pay taxes on some of those benefits if your IRA or 401(k) withdrawals increase your overall "combined" income past a certain limit.

When Will You Pay Taxes on Your Benefits?

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

For instance, suppose you received $17,000 in Social Security benefits in 2020 and reported it on the tax return you filed in 2021. You also kept working part-time, and you had $12,000 in earned income. Your IRA produced $5,000 in tax-exempt income. All told, you had a total income of $34,000.

For tax purposes, the IRS would use half of your Social Security benefits ($17,000 / 2 = $8,500) + your earned income ($12,000) + your IRA distribution ($5,000). Your taxable base amount would be $25,500. That is more than the combined income base amount for your filing status if you're single. The threshold is $25,000 as of the 2020 tax year. You would owe income tax on part of your benefits.

The income base shouldn't be confused with the earnings limit. You might owe some of your 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 with incomes over $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. In this case, you must add together the income of both spouses, even if one of you isn't getting Social Security. Couples with combined incomes of less than $32,000 won't pay taxes on their 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 they do not apply to income earned from Roth IRAs. You pay taxes on the money you put into a Roth IRA at the time you make those contributions, so you won't pay any when you withdraw the money.

Another benefit of a Roth IRA is that there's no set schedule for withdrawing your money. Traditional IRAs and 401(k) plans require that you begin withdrawals after you reach the age of 70 1/2 if you reached that age before January 1, 2020. Otherwise, you have until age 72. 

It's worth talking to your financial advisor to find out whether a Roth IRA is right for you if you're concerned about the burden of taxes after your retirement. It will depend on the specifics of your situation.

Frequently Asked Questions (FAQs)