Some people ready for retirement may wonder what happens to their Social Security benefits if they receive distributions from their retirement accounts.
The simple answer is that income that you receive from your 401(k) or other qualified retirement plan does not affect the amount of the Social Security retirement benefit that you receive each month.
However, you may be required to pay taxes on some of your benefits if your annual income, which includes your 401(k) distributions, exceeds a certain threshold.
Key Takeaways
- Although you must start withdrawals from your 401(k) after age 72 (age 73 if you turned 72 after Dec. 31, 2022), you can begin making withdrawals as early as age 59½.
- Social Security retirement benefit income does not change due to other retirement income, such as that from 401(k) plans.
- Social Security income is determined by your lifetime earnings and the age at which you elect to start taking Social Security benefits.
- Distributions from a 401(k) may increase your total annual income to a point where your Social Security benefit amount is subject to taxes.
- You could pay tax on up to 85% of your Social Security benefits, according to IRS rules.
401(k) Income Doesn't Change Social Security Benefits
Your Social Security benefits are determined by the amount of money that you earned during your working years—years in which you paid into the program via Social Security taxes. Your 401(k) contributions and withdrawals have nothing to do with the amount of those benefits
And since contributions to your 401(k) are made with compensation received from employment at a U.S. company, you have already paid Social Security taxes on those dollars.
But wait—weren't contributions to your 401(k) account made with pre-tax dollars? Yes, but this tax shelter feature only applies to federal and state income tax, not Social Security tax.
You pay Social Security taxes on the full amount of your compensation in the year you earned it, up to a pre-determined annual limit established by the Internal Revenue Service (IRS). This limit is increased yearly to account for inflation. For 2023, it is capped at $160,200. For 2024, the figure is $168,600.
To sum it up, you'll owe income tax on 401(k) distributions when you take them, but no Social Security tax. Plus, the amount of your Social Security benefit won't be affected by your 401(k) taxable income.
Contributions to a 401(k) are subject to Social Security and Medicare taxes but are not subject to income taxes unless you make a Roth (after-tax) contribution.
The Tax Impact of 401(k) Savings
While you'll owe no Social Security taxes on 401(k) distributions, you may have to pay income taxes on some of your benefits if your annual combined income, which includes those distributions, exceeds a certain amount.
According to the Social Security Administration (SSA), combined income is equal to the sum of:
- Your adjusted gross income (AGI) (which includes earned wages and withdrawals from any retirement savings accounts like IRAs and 401(k)s)
- Any nontaxable interest
- And one-half of your Social Security benefits
If you take large distributions from your traditional 401(k) in any given year that you receive benefits, you are more likely to exceed the income threshold and increase your tax liability for the year.
Annual Income Thresholds
If your total income for the year is less than $25,000 and you file as an individual, you won't be required to pay taxes on any portion of your Social Security benefits. If you file jointly as a married couple, this limit is $32,000.
You may be required to pay taxes on up to 50% of your benefits if you are an individual with income between $25,000 and $34,000, or if you file jointly and have income between $32,000 and $44,000.
Up to 85% of your benefits may be taxable if you are single and earn more than $34,000 or if you are married and earn more than $44,000.
Other Factors Affecting Social Security Benefits
In certain cases, other types of retirement income may affect your benefit amount, even if you collect benefits on your spouse's account.
For example, your benefits may be reduced to account for the income you receive from a government pension or from another job for which your earnings were not subject to Social Security taxes. This primarily affects people working in state or local government positions, the federal civil service, or those who have worked for a foreign company.
Government Pension Offset
If you worked in a government position and received a pension for work that is not subject to Social Security taxes, the Social Security benefits received by a spouse or widow/widower will be reduced by two-thirds of the amount of the pension. This rule is called the government pension offset.
For instance, if you are eligible to receive $1,200 in Social Security but also receive $900 per month from a government pension, your Social Security benefits will be reduced by $600 (2/3 x $900) to account for your pension income. Your total monthly income of $2100 ($1,200 + $900) would become $1,500 ($600 + $900).
This windfall elimination provision (WEP) reduces the unfair advantage given to those who receive benefits on their own account and receive income from a pension based on earnings for which they did not pay Social Security taxes. In these cases, the WEP simply reduces Social Security benefits by a certain factor, depending on the age and birth date of the applicant.
To ensure benefits maintain their buying power, the Social Security administration adjusts them every year in accordance with changes in the cost of living. For example, as of January 2023, theCOLAresulted in an increase to Social Security and Supplemental Security Income (SSI)benefits of 8.7%. For 2024, benefits will increase by 3.2%.
Determining Your Social Security Benefit
Your Social Security benefit amount is largely determined by how much you earn during your working years, your age when you retire, and your expected lifespan.
Based on Earnings
Essentially, the more you earned, the higher your benefits will be. Workers retiring at full retirement age can receive a maximum monthly benefit amount of $3,627 in 2023. In 2024, that figure will be $3,822.
The SSA calculates an average monthly benefit amount based on your average income and the number of years you are expected to live.
Based on When Benefits Start
In addition to these factors, your age when you begin taking benefits also plays a crucial role in determining your benefit amount. While you can begin receiving Social Security benefits as early as age 62, your benefit amount is reduced for each month that you begin collecting before your full retirement age.
The full retirement age is 66 if you were born from 1943 to 1954. If you were born from 1955 to 1960, full retirement age increases from age 66 by two months each year until it reaches age 67. If you were born in 1960 or later, full retirement age is 67.
Furthermore, your benefit amount may be increased if you continue to work and delay receiving benefits beyond your full retirement age. For example, in 2023, the maximum monthly benefit amount for those retiring at full retirement age is $3,627. That amount is $3,822 in 2024.
For those who start taking their benefits early, at age 62, the maximum drops to $2,572. Those who wait until age 70—the latest you can start—can collect a benefit of $4,555 per month. For 2024, those figures are $2,710 and $4,873, respectively.
Are 401k Withdrawals Considered Income for Social Security?
Not income on which you'd pay Social Security taxes. Social Security only considers earned income, such as a salary or wages from a job or self-employment. However, they will be included in income that determines whether, and what portion of, your Social Security benefits are taxable.
What Income Reduces Social Security Benefits?
In the year you reach full retirement age, the SSA will deduct $1 in benefits for every $3 you earn above the annual limit, which is $56,520 in 2023 ($59,520 in 2024). If you are under full retirement age for the entire year, the SSA will instead deduct $1 from your benefit payments for every $2 you earn above the annual limit of $21,240 ($22,320 in 2024).
Should I Use My 401(k) Before Social Security?
Although you must start withdrawals from your 401(k) after age 72 (age 73 if you turned 72 after Dec. 31, 2022), you can start withdrawing from your 401(k) plan as early as 59½ years old. That's sooner than you are eligible to begin receiving social security benefits. However, if you are still working, it is best to defer withdrawing from either in order to maximize your retirement income. In general, it is also advised to take 401(k) distributions to supplement social security retirement income.
The Bottom Line
Income from a 401(k) does not affect the amount of your Social Security benefits, butit can boost your annual income to a point where those benefits will be taxed. This can be a conundrum for someone who's at an age where they're required both, to start withdrawing from their 401(k) and to start collecting Social Security.
Regardless, make sure you are aware of annual changes to Social Security income thresholds. Factor in tax liabilities when planning for retirement or deciding how big a 401(k) distribution to take.
