The ideal mix of retirement income includes money from Social Security, a private pension, and a retirement nest egg of investments. Many investors save for retirement using IRAs and 401(k)s, and some fear that their retirement assets will somehow cause them to miss out on the full benefits of Social Security. IRA and 401(k) distributions don't affect the monthly payments that you'll receive from Social Security, but they can have an indirect impact by requiring you to include a portion of your Social Security benefits in your taxable income.
No direct impact
The main determinant of your Social Security benefits is the work history that you've built over your career. Social Security takes your 35 top-earning years (adjusting for inflation) and then calculates a baseline monthly benefit based on your average earnings over that period. In general, the higher your earnings, the greater your monthly payment, but the rate of increase slows down as your income gets higher.
Social Security is not a means-tested program, and your benefits don't get reduced due to income from retirement account distributions. Forfeiture of benefits only occurs if you keep working while taking early-retirement benefits from Social Security and your annual income exceeds certain thresholds. IRA and 401(k) distributions don't count as earned income, so they have no effect on whether you meet the thresholds for benefit forfeiture.
Getting taxed on your benefits
Where 401(k) and IRA distributions can affect your benefits is in the realm of income taxation. If your combined income -- that is, the sum of your adjusted gross income, nontaxable interest, and one-half of your annual Social Security benefits -- is below a certain level, then none of your Social Security benefits are subject to tax. However, for single filers with combined incomes of $25,000 or more and joint filers with incomes of $32,000 or more, up to 50% of their benefits may be subject to taxation. The percentage of taxable benefits rises to as much as 85% for single filers with incomes of $34,000 and joint filers with incomes of $44,000.
Distributions from traditional IRAs and 401(k) plans do count toward your combined income. Therefore if your retirement plan distributions take your income over the threshold, then you can lose some of your benefits to income tax. That's not a direct reduction of benefits, but it reduces your after-tax take-home pay.
Social Security recipients don't have to worry about directly losing benefits just because they have an IRA or 401(k). However, they should know whether they might end up paying Uncle Sam higher taxes as a result.
If you want to know more about IRAs in particular, we have you covered. For more on the ins and outs of IRAs, including how to get started investing in them, check out our IRA Center.
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