From Retirement Now Newsletter April 1st 2021
|Can Early Social Security Benefits Be Reduced Because of My IRA Withdrawals?
I had the following question come up recently concerning Social Security benefits and how they can be impacted by withdrawals from retirement accounts like Traditional IRA’s, 401(k)’s, TSP’s, etc.
First a little background…
A lot of people don’t wait until full retirement age before drawing Social Security benefits. For most people their full retirement age will be between 66 and 67 depending on the year they were born in. For everyone born in 1960 or later, their full retirement age is 67.
When you draw Social Security before your full retirement age, there is an annual earnings limit that if you exceed it can cause some of your Social Security benefits to be reduced during that year.
For 2021 that earnings limit is $18,960.
Every $2 you earn over that limit will reduce your Social Security benefit by $1. But in the year which you would reach full retirement age, they up the earnings limit to $50,520, and deduct $1 of benefits for every $3 you earn above the threshold.
Turns out the Social Security website has a handy article that breaks it down with examples
What about withdrawals from my IRA?
The big issue that many retirees may face is that they retire before their full Social Security retirement age, start drawing Social Security, and also begin taking withdrawals from their IRA’s for additional retirement income.
Withdrawals from a traditional IRA are counted as taxable income on an income tax return. Hence the question:
“Will my IRA withdrawals cause my income to exceed the above-mentioned income thresholds, and essentially cause me to have reduced Social Security benefits?”
And the answer to that question, thankfully, is No.
From Social Security’s website they print the following:
“When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you’re self-employed. We include bonuses, commissions, and vacation pay. We don’t count pensions, annuities, investment income, interest, veterans, or other government or military retirement benefits.”
So although withdrawals from retirement accounts (like IRA’s, 401k’s, TSP’s, etc) may increase your taxable income, they will not be counted toward the earnings limit for Social Security benefits for those under their full retirement age.
And once you reach full retirement age, you don’t have to worry about any of this at all since the earning limits no longer apply.
That’s the good news.
The bad news is that the withdrawals from IRA’s that are counted as taxable income may cause more of your Social Security benefits to be subject to taxation. Under current tax law if your income exceeds certain thresholds a portion of your Social Security benefits (up to 85%) could be subject to taxation.
Retirement account withdrawals will not trigger any reduction in Social Security benefits for people under their full retirement age. The withdrawals could, however, increase your taxable income and possibly cause up to 85% of your Social Security benefits to be subject to taxation.
So it’s still important to look at tax planning strategies to help minimize the tax bite on your benefits in retirement as much as possible.
P.S. We specialize in helping retirees (and those retiring in the next 5-10 years) determine how much they need to save, how to not run out of money, and help them lower their taxes throughout their retirement years.
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