Income that you receive from your 401(k) or other qualified retirement plan doesn't affect the amount of the Social Security retirement benefit you receive each month but you may be required to pay taxes on some of your benefits. It depends on whether your annual income including your 401(k) distributions exceeds a certain threshold.
Key Takeaways
- You must start withdrawals from your 401(k) after age 72 or age 73 if you turned 72 after Dec. 31, 2022 but you can begin taking withdrawals as early as age 59½.
- Social Security retirement benefit income doesn't 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 begin taking Social Security benefits.
- Distributions from a 401(k) may increase your total annual income to a point where some of 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 Benefits
Your Social Security benefits are determined by the amount of money you earned during your working years during which you paid into the program via Social Security taxes. Your 401(k) contributions and withdrawals have nothing to do with the amount of these benefits
Contributions to your 401(k) were made with compensation received from employment at a U.S. company so you've already paid Social Security taxes on those dollars. Yes, contributions to your 401(k) account were made with pre-tax dollars but this tax shelter feature applies only to federal and state income tax, not Social Security tax.
You paid Social Security tax 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. It's $168,600 in 2024.
You'll owe income tax on your 401(k) distributions when you take them but not Social Security tax and 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 aren't subject to income taxes unless you make a Roth (after-tax) contribution.
The Tax Impact of 401(k) Savings
You may have to pay income tax on some of your Social Security benefits if your annual combined income including those distributions and other income 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
You're more likely to exceed the income threshold and increase your tax liability for the year if you take large distributions from your traditional 401(k) in any given year that you receive benefits.
Annual Income Thresholds
You won't be required to pay taxes on any portion of your Social Security benefits if your total income for the year is less than $25,000 and you file as an individual. The limit is $32,000 if you file jointly with your spouse.
You may be required to pay taxes on up to 50% of your benefits if you're an individual with income between $25,000 and $34,000 or if you file jointly and you and your spouse have income between $32,000 and $44,000.
Up to 85% of your benefits may be taxable if you're single and earn more than $34,000 or if you're married and earn more than $44,000.
Other Factors Affecting Social Security Benefits
Other types of retirement income can affect your benefit amount in certain cases, even if you collect benefits on your spouse's account. Your benefits may be reduced to account for the income you receive from a government pension or from another job for which your earnings weren't subject to Social Security taxes.
This rule 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
The Social Security benefits received by a spouse or widow/widower will be reduced by two-thirds of the amount of the pension if you worked in a government position and received a pension for work that isn't subject to Social Security taxes. This rule is referred to as the government pension offset.
Your Social Security benefits will be reduced by $600 (2/3 x $900) to account for your pension income if you're eligible to receive $1,200 in Social Security but also receive $900 per month from a government pension. Your total monthly income of $2100 ($1,200 + $900) would drop to $1,500 ($600 + $900).
This windfall elimination provision (WEP) reduces the unfair advantage given to those who receive benefits on their account and receive income from a pension based on earnings for which they did not pay Social Security taxes. The WEP simply reduces Social Security benefits by a certain factor in these cases, depending on the age and birth date of the applicant. But it doesn't apply if you also have 30 or more years of earnings on which you did pay Social Security tax.
The Social Security Administration adjusts benefits every year in accordance with changes in the cost of living to ensure that benefits maintain their buying power. The cost of living adjustment(COLA) resulted in an increase to Social Security and Supplemental Security Income (SSI)benefits of 3.2% in 2024.
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
The more you earn during your working years, the higher your benefits will essentially be. Workers who retire at full retirement age can receive a maximum monthly benefit amount of $3,822 in 2024.
The SSA calculates an average monthly benefit amount based on your average income and the number of years you're expected to live.
Based on When Benefits Start
Your age when you begin taking benefits also plays a crucial role in determining your benefit amount. You can begin receiving Social Security benefits as early as age 62 but your benefit amount is reduced for each month that you begin collecting before you reach your full retirement age.
Your full retirement age is 66 if you were born from 1943 to 1954. It increases from age 66 by two months each year until it reaches age 67 if you were born from 1955 to 1960. Full retirement age is 67 if you were born in 1960 or later.
Your benefit amount may be increased if you continue to work and delay receiving benefits beyond your full retirement age. The maximum monthly benefit amount for those retiring at full retirement age is $3,822 in 2024.
The maximum drops to $2,710 for those who start taking their benefits early at age 62 as of 2024. Those who wait until age 70, the latest you can start, can collect a benefit of up to $4,873 per month.
Are 401k Withdrawals Considered Income for Social Security Purposes?
They're not income on which you'd have to pay Social Security taxes. Social Security only considers earned income, such as a salary or wages from a job or self-employment. But withdrawals will be included in income that determines whether your Social Security benefits are taxable and, if so, how much of them.
What Income Reduces Social Security Benefits?
The SSA will withhold $1 in benefits for every $3 you earn above the annual limit in the year you reach full retirement age. This limit is $59,520 in 2024. The SSA will instead deduct $1 from your benefit payments for every $2 you earn above the annual limit of $22,320 in 2024 if you're under full retirement age. There is no withholding after you reach full retirement age.
Should I Use My 401(k) Before I Take Social Security?
You must start withdrawals from your 401(k) after age 72 or age 73 if you turned 72 after Dec. 31, 2022 but you can start withdrawing from your 401(k) plan as early as age 59½. That's sooner than you're eligible to begin receiving Social Security benefits but it's best to defer withdrawing from either to maximize your retirement income if you're still working. It's also advised to take 401(k) distributions to supplement Social Security retirement income.
The Bottom Line
Income from a 401(k) doesn't 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 to both start withdrawing from their 401(k) and start collecting Social Security.
Make sure you're aware of annual changes to Social Security income thresholds. Factor in tax liabilities when you're planning for retirement or deciding how large of a 401(k) distribution you should take.
