Taking distributions from your retirement account will not reduce your Social Security benefits. However, these distributions will add to your income, which will affect the taxes you pay and could cause your Medicare premiums to rise.
Added to any wages and other income sources, distributions from traditional individual retirement accounts and 401(k)s are taxable and may boost your combined income above the threshold where a portion of your Social Security benefits also become taxable.
Social Security income is tax-free if combined income is less than $25,000 for single filers ($32,000 for married couples filing jointly). Combined income is defined as Adjusted Gross Income (which includes wages, self-employment income, interest, dividends, capital gains, pension and retirement income, etc.) plus tax-exempt interest and one-half of Social Security benefits.
For single filers with combined income over $25,000, 50 percent of Social Security benefits is subject to tax; for incomes over $34,000, 85 percent is taxed. For married taxpayers filing jointly, the income triggers are $32,000 and $44,000.
Roth IRA distributions are always tax-free and have no impact on total Social Security benefits or the taxes you will pay on them.
The bottom line is that taking IRA distributions will not reduce your Social Security but could boost your income to a level where you’ll pay a share of your benefits back in taxes. Remaining aware of these levels and managing your distributions carefully can help you keep more of your Social Security check. The picture gets more complicated if you choose to begin drawing Social Security before full retirement age while still working: your earned income could result in a reduction of benefits.
Another consideration to keep in mind as you manage your IRA distributions is how they will affect your income for purposes of Medicare. You are eligible for Medicare upon turning 65, and the cost of premiums will depend on your annual income and the health plans you select. If you are receiving Social Security benefits when you enroll in Medicare, these premiums will be automatically deducted from your Social Security checks. If you earn less than the “higher-income” threshold of $87,000 for individuals or $174,000 for married couples filing jointly, you will pay the standard premium rate of $144.60 per month in 2020. As your income rises above the threshold, so will your Medicare premiums—to a maximum of $491.60 per month if your income exceeds $500,000 for an individual or $750,000 for a couple. In addition to higher premiums, higher-income beneficiaries are not protected by the “hold harmless” rule, which prevents most Social Security recipients from receiving decreased benefits as Medicare premiums rise annually.
When determining the optimal timing for distributions from your retirement accounts, working with experienced tax and financial professionals can help you maximize your income and benefits. Contact us today to schedule a consultation!
We are Arbor Wealth Management, a Phoenix-based firm that offers comprehensive financial planning services. We’re partners in your financial future. Like a conductor coordinating a beautiful symphony, we’re intimately involved in your financial future. We take the time to know how each instrument in your personal orchestra is performing, keeping all aspects of your plan in tune. We accomplish this by making sure your finances remain pliable, whether you are in an accumulation or distribution stage in life.