How IRA Withdrawals Affect Social Security
For many retirees, Social Security benefits and withdrawals from retirement accounts like IRAs are the primary sources of income. It's crucial to understand how these two income streams interact, as it can have a significant impact on your tax liability.
Understanding Provisional Income
The key to this issue is your "provisional income." The IRS uses this figure to determine whether your Social Security benefits are taxable. To calculate your provisional income, you take your modified adjusted gross income (MAGI), add any tax-exempt interest, and then add half of your Social Security benefits for the year.
Provisional Income = MAGI + Tax-Exempt Interest + (0.5 x Social Security Benefits)
How IRA Withdrawals Fit In
Withdrawals from traditional IRAs are included in your modified adjusted gross income. This means that every dollar you take from your traditional IRA increases your provisional income, which in turn can make more of your Social Security benefits taxable.
Taxation Thresholds
For 2024, the thresholds for taxation of Social Security benefits are as follows for individuals:
If your provisional income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
If your provisional income is more than $34,000, up to 85% of your benefits may be taxable.
For married couples filing jointly, the thresholds are:
Between $32,000 and $44,000, up to 50% of your benefits may be taxable.
More than $44,000, up to 85% of your benefits may be taxable.
Strategic Withdrawals
Because IRA withdrawals can trigger taxes on your Social Security benefits, it's important to be strategic about how and when you take them. A financial advisor can help you create a withdrawal strategy that minimizes your tax burden and maximizes your retirement income. This might involve a combination of strategies, such as Roth conversions or carefully timing your withdrawals.
Understanding the interplay between your various income sources is essential for a tax-efficient retirement. To discuss your specific situation, schedule a consultation with our team.
