Social Security: Will a Roth IRA Make Your Benefits Taxable?

Assuming your Roth IRA was established at least five years ago and you are at least 59-1/2 years of age, the most likely answer is "no."

Aug 24, 2014 at 8:00PM

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The appeal of a Roth IRA is that any money contributed to one is allowed to grow tax-free. But is this benefit mitigated by separate rules governing the taxation of Social Security benefits?

Here's why I ask this question: A recent article of mine outlined the tax treatment of Social Security benefits. The piece explained when Social Security benefits are considered taxable income for the purposes of federal income taxes, as well as what tax rate would apply.

I received a number of responses from readers. One in particular caught my attention: "I know a withdrawal from a Roth IRA is not taxable, but is it considered taxable income for the purpose of determining if Social Security benefits are taxable?"

Calculating your "combined income"
This is a great question, because it points out a potential conflict between two sets of rules. On one hand, you have the rules governing retirement accounts like Roth IRAs. And on the other, you have the rules governing the tax treatment of Social Security benefits.

Fortunately, while the answer may not be immediately apparent, it turns out there is no actual conflict. In other words, as a general rule, Roth IRA distributions will not count against you when it comes to determining the portion of your Social Security benefits that must be included in taxable income.

Here's the rationale: Social Security benefits are taxable only if your "combined income" exceeds certain thresholds. At present, the thresholds are as follows:

Scenario

Single Taxpayer

Joint Taxpayers

Social Security benefits not taxed if combined income is less than...

$25,000

$32,000

As much as 50% of benefits taxed if combined income is between...

$25,000 and $34,000

$32,000 and $44,000

As much as 85% of benefits taxed if combined income is more than...

$34,000

$44,000

Source: Social Security Administration.

Needless to say, this requires you to determine your combined income. To do so, you add together the following things: wages, taxable interest, ordinary dividends, taxable refunds, alimony received, business income or loss, capital gains, farm income, unemployment compensation, and taxable distributions from an IRA, pension, or annuity.

While you then subtract a number of deductions from this figure -- including moving expenses, health savings account deductions, and more -- this step has no bearing on the issue at hand.

Determining whether your Roth IRA distribution is "qualified"
The question, then, is whether your Roth IRA distributions are considered a "taxable" distribution for the purposes of determining your combined income. And the answer is "no," so long as the distribution meets the requirements of a "qualified distribution."

Using the International Revenue Service's language verbatim, a qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements:

  1. It is made after the five-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and
  2. The payment or distribution is:
  • Made on or after the date you reach age 59-1/2,
  • Made because you are disabled (defined earlier),
  • Made to a beneficiary or to your estate after your death, or
  • One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit).

To make a long story short, here's the takeaway: Assuming your Roth IRA was established at least five years ago, and also that you are at least 59-1/2 years of age, any distributions from this IRA are considered qualified and are thus not included in your combined income for the purpose of determining whether you owe income taxes on any portion of your Social Security benefits.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

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