Social Security is a government-created program designed to provide a source of continuous income to retirees, but what most people don't know is that if you earn more than a certain amount, the government will take some of that money back in the form of a benefit tax. This means retirees need to be strategic about how much they withdraw from their retirement accounts so that they don't accidentally cost themselves money. Below, I'll explain how your retirement fund withdrawals could affect your Social Security benefits and what you can do about it.

How your income affects your Social Security benefits

If your "combined income" -- a Social Security Administration figure that I'll explain below -- is above a certain threshold, then up to 85% of your Social Security benefits could be taxed as income. The combined-income threshold varies by marital status. Beneficiaries with a combined income over $25,000 and married couples filing jointly with a combined income of more than $32,000 could be taxed on up to 50% of their benefits. Individuals with a combined income over $34,000 and couples with a combined income over $44,000 could be taxed on up to 85% of their benefits.

Mature couple evaluating finances

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So how do you figure out if you fall into one of these ranges? Your combined income is calculated based on three figures: your adjusted gross income, any nontaxable interest you've earned and half of your Social Security benefits. Your adjusted gross income is the total amount of taxable income you earn in a year, minus certain adjustments, such as half of any self-employment taxes, alimony payments, or contributions to retirement accounts. Your AGI does include withdrawals from traditional retirement accounts -- including traditional 401(k)s and IRAs -- but it doesn't include withdrawals from Roth accounts, because contributions to these accounts are taxed up front. You may have nontaxable interest if you have tax-exempt bond funds in your investment portfolio.

Once you have this information, you just add up the numbers to figure out your combined income. So if you withdraw $25,000 from your traditional retirement accounts, you have $2,000 in nontaxable interest, and you're getting $12,000 per year from Social Security, your combined income would be $33,000:

$25,000 + $2,000 + 1/2($12,000) = $33,000

Remember that if your combined income exceeds one of the taxation thresholds above, that doesn't mean you'll be taxed on the full amount. There's a special formula that determines how much tax you'll actually pay on your benefits. This can be complicated to figure out on your own, but fortunately there are Social Security tax calculators that can do the work for you.

How to avoid being taxed on your Social Security benefits

The simplest way to avoid Social Security benefit taxation is to be mindful of how much you're withdrawing from your retirement accounts each year. If you're close to one of the taxation thresholds, you could try to withdraw a little less than you planned to avoid the tax. But if you regularly find yourself bumping up against the limit, you may have to make some adjustments.

It's typically best to delay distributions from your Roth IRA as long as possible so that it can continue to grow tax-free, but there are times when you may want to tap it sooner. If you're close to the Social Security taxation thresholds listed above, consider taking more money from Roth accounts and less from traditional accounts. This could lower your combined income enough to avoid Social Security benefit taxes while still providing enough income to cover your living expenses. And if you're not yet retired, consider investing through a Roth-type account -- or even rolling over some existing savings from a traditional account to a Roth account -- to help you manage your taxes in retirement.

Even if you cannot avoid paying taxes on some of your Social Security benefits, it still pays to understand how this works. You may be able to reduce your tax burden, and at the very least, you won't get a nasty surprise come tax time.