How IRAs Impact Social Security

Traditional IRA withdrawals can push more of your Social Security into the taxable zone, up to 85%, which can add up over time. That's why it's important to get smart about when and how you pull money from your traditional IRA, helping you keep thousands more in your pocket every year.

Pairing Social Security with your IRA is one of the best ways to power your retirement, but skip the tax surprise. Done right, it’s a powerful income strategy — done wrong, it can quietly eat a big chunk of your retirement cash.

Let’s take a deeper look at how IRAs impact your Social Security.

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As much as 85% of your Social Security benefits are subject to federal income taxes. This is based on your “combined income,” or your adjusted gross income (AGI) plus nontaxable interest and half your annual Social Security benefits. You will include the amounts from your spouse if you file jointly.

As for the AGI, it includes wages, interest, investment income and distributions from traditional 401(k)s and IRAs. You can then make adjustments, such as for a health savings account (HSA) and other calculations that might change your AGI.

Here are the tiers of taxes due on Social Security benefits for individuals and couples filing jointly.

If your combined income is under $25,000 (single) or $32,000 (married filing jointly), your Social Security benefits are not taxed.
For combined income between $25,000 and $34,000 (single) or between $32,000 and $44,000 (married filing jointly), up to 50% of your benefits might be taxed.
For combined income above $34,000 (single) or above $44,000 (married filing jointly), up to 85% of your benefits might be taxed.

As an illustration, suppose you and your spouse are retired. Your combined Social Security benefits are $35,000, and you take an IRA distribution of $35,000.

Half the Social Security benefits totals $17,500, which you then add to the IRA distribution for a total of $52,500 in combined taxable income.

However, while this amount is above the threshold for being taxed as much as 85% of the benefits, this does not necessarily mean you will pay at this level. This is the maximum.

You can use Worksheet 1 from the IRS to calculate your taxable benefits. But this is a complex area, and it's a good idea to seek the help of a tax expert or use tax software.

However, if you hadn't taken an IRA distribution, the Social Security benefits would have been tax-free.

Another issue with an IRA withdrawal is that it can push you into a higher Medicare Income-Related Monthly Adjustment Amount (IRMAA) bracket.

“This increases your Medicare premium,” said Marcus Holzberg, a certified financial planner™ at Holzberg Wealth Management. “Since Medicare is deducted from your Social Security check, this will inadvertently reduce your Social Security benefits.”

Despite what you might have heard, the Social Security Administration doesn't count IRA distributions as earned income when determining Social Security payments. The same goes for pension payments, annuities or interests and dividends from savings and investments.

None of that will lower your monthly benefits, although it can cause a taxable event if your AGI increases as a result.

Required minimum distributions (RMDs)

To avoid taxes on your Social Security benefits, you can defer taking distributions from your IRA. The added benefit is that your money is allowed to grow over time.

But there is a limitation: required minimum distributions (RMDs). This is when you must make withdrawals from your traditional IRA or other pre-tax retirement accounts such as a Simple IRA, SEP IRA, 401(k) and 403(b). The amount is considered income for the taxes on your Social Security benefits.

RMDs are triggered based on your age, 73 if you were born between 1951 and 1959, jumping to 75 if born in 1960 or later. The amount of the withdrawal is based on a calculation from the IRS, which includes the account balance and your life expectancy. If you don't make the distribution, you'll be subject to paying income taxes and a 25% penalty.

One way to deal with the impact of RMDs is by taking a qualified charitable distribution (QCD). “This allows you to use distributions from your IRA to contribute directly to qualified charities,” said Holzberg. “In doing this, the IRA distribution is not included in your income, thereby lowering your AGI.”

On the other hand, you can delay when you claim Social Security benefits. You can wait until age 70. For every year you delay receiving the benefits, your annual payment increases by about 8%.

When it comes to tapping into your retirement income, the type of IRA you have can affect how much of your Social Security benefits are subject to federal taxes.

Traditional IRAs let you deduct contributions upfront, but withdrawals count as ordinary taxable income. That extra income boosts your combined income — your adjusted gross income plus nontaxable interest, plus half your Social Security benefits — which can push you over the thresholds where up to 85% of your benefits get taxed federally.

Roth IRAs offer a clear advantage, because contributions are made with after-tax dollars, and qualified withdrawals are tax-free and do not increase your adjusted gross income (AGI).

As a result, these distributions are excluded when calculating your combined income, so they don't affect whether your Social Security benefits are subject to federal income tax. That's a big advantage. This also helps prevent your benefits from being pushed into the 50% or 85% taxable range, avoiding any unexpected tax liability from those withdrawals.

At the end of the day, the way you manage your IRA can either protect or erode the after-tax value of your Social Security benefits. The key is planning rather than reacting later.

That might mean making Roth conversions during lower-income years, spacing out traditional withdrawals to stay below the tax threshold, or aligning distributions around RMDs. The small steps you take today can make a meaningful difference in how much you have on hand in retirement.

Tax rules and your personal circumstances can vary. Consult with a financial adviser or tax professional to run your specific numbers and maximize what you actually keep. That way, you can enjoy your retirement with fewer surprises.

Tom Taulli has been developing software since the 1980s when he was in high school. He sold his applications to a variety of publications. In college, he started his first company, which focused on the development of e-learning systems. He would go on to create other companies as well, including Hypermart.net that was sold to InfoSpace in 1996. Along the way, Tom has written columns for online publications such as Bloomberg, Forbes, Barron's and Kiplinger. He has also written a variety of books, including Artificial Intelligence Basics: A Non-Technical Introduction. He can be reached on Twitter at @ttaulli.

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