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In the Media - How IRAs Impact Social Security (Kiplinger)

In the Media -  How IRAs Impact Social Security (Kiplinger)

Supplementing your benefits from Social Security with IRA withdrawals can be an effective and necessary strategy to fund your retirement. However, there are potential tax considerations once you start taking withdrawals from your traditional IRA or other pre-tax retirement account(s). Up to 85% of your Social Security benefits can be included in your gross income for that year and, therefore, be subject to income taxes.

The portion of your Social Security benefits subject to taxation is based on your modified adjusted gross income (MAGI) – this includes your adjusted gross income plus other things like excluded municipal bond interest, excluded foreign earned income, excluded U.S. Savings Bond interest, and more. You may also see your MAGI, in this case, referred to as your "combined income." The higher your MAGI, the higher your percentage of benefits subject to taxation – up to 85% of your benefits.

If you do not need the additional income from your retirement accounts in the early years of your retirement, you may wish to defer making distributions. This has the added benefit of allowing your money to continue growing and holding off on paying the taxes for withdrawals. However, once you are in your 70s, RMDs are triggered. Required Minimum Distributions (RMDs) are the minimum annual amounts the IRS requires you to withdraw from pre-tax retirement accounts (e.g., Traditional IRAs, 401(k)s, SEP IRAs, and SIMPLE IRAs). By taking distributions from these accounts, the amounts are added to your gross income and, therefore, affect the amount of your Social Security benefits that are subject to being taxed. The age at which you have to start taking RMDs depends on when you were born and begins sometime between ages 72 and 75 – check out our Important Age Milestones to Consider for Your Financial Plan blog post to see your RMD age.

NOTE: Withdrawals from Roth IRAs (and other Roth retirement accounts) do not impact your Social Security taxation. Since withdrawals from these accounts are tax-free, they are not added to your gross income. Additionally, Roth IRAs are not subject to RMD rules.

Another area affecting your Social Security is when you decide to claim the benefits. It all depends on whether you choose to claim the benefits before, at, or after your full retirement age (FRA). Your specific FRA depends on your birth year, and it indicates the age at which you are entitled to receive the full retirement benefits available to you. If you claim your benefits before your full retirement age, currently as early as age 62, you will receive a reduced monthly benefit. Additionally, by claiming the benefits early, your benefits will always be at the reduced amount. On the other hand, if you delay receiving Social Security retirement benefits beyond your full retirement age, you will receive an increase in your benefits when you do claim those benefits. Those benefits increase every year until you turn 70, at which point you have reached the maximum amount of Social Security benefits available to you. To find out your FRA, check out our Important Age Milestones to Consider for Your Financial Plan blog post.

When considering taking larger distributions from your IRA, you should know that it might push you into a higher Medicare Income-Related Monthly Adjustment Amount (IRMAA) bracket, which increases your Medicare premium. Since Medicare is deducted from your Social Security check, this will inadvertently reduce your Social Security benefits.

Also, converting funds from a traditional IRA to a Roth IRA via a Roth conversion may be a good idea while you are younger and/or in a lower tax bracket to decrease the amount you need to take out of your traditional IRA(s) later on in the form of RMDs. However, this strategy is only for some; it is likely not worth it if you are well into retirement.

Lastly, if you do not need the money you have to take out from RMDs to support yourself and are charitably inclined, a Qualified Charitable Distribution (QCD) may be a good idea. This allows you to use distributions from your IRA to contribute directly to qualified charities. In doing this, the IRA distribution is not included in your income, thereby lowering your AGI.

To learn more about Social Security taxation and IRA withdrawals, check out the article here in Kiplinger featuring Marcus Holzberg, CFP®.

If you have questions about how your retirement income may affect your Social Security taxation, we are here to support and guide you. You can schedule a complimentary, no-obligation call with us here!

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About the Author

Holzberg Wealth Management is a family-owned and operated financial planning and investment management firm based in Marin County, CA. As your financial advisors, we serve you as a fiduciary and are fee-only, so we never receive commissions of any kind. We help individuals and families like you in the greater San Francisco Bay Area and virtually nationwide with the financial decision-making process to organize, grow, and protect your assets.

** This writing is for informational purposes only. The author and Holzberg Wealth Management do not guarantee or otherwise promise any results that may be obtained from using this report. No reader should make any investment decision without first consulting their financial advisor and conducting their own research and due diligence. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author and do not constitute a recommendation, offer, or solicitation to make any securities transaction. The information provided in this report is obtained from sources that the author believes to be reliable. External links to third parties are being provided for informational purposes only. Holzberg Wealth Management is not affiliated with the third-party websites linked to, unless otherwise explicitly stated, and does not constitute an endorsement or approval by Holzberg Wealth Management of any of the third party’s products, services, or opinions.


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