Ask The Advisor: February 2012

Ask The Advisor: February 2012

Will My Social Security Benefits Be Taxable?

Q: I’m single and I live alone. When I retire this year I will receive payments from a 401(k) and a traditional IRA of approximately $20,000. My annual Social Security benefit will be around $16,000. Will my Social Security benefit be subject to income tax even though I will not be working?

A: Possibly. A great deal will depend on how much of your 401(k) and IRA distributions are taxable. A quick way to check is to take one-half of your total Social Security benefits, add to that all taxable pensions, wages, interest, dividends and other taxable income. Then add any tax-exempt interest income (such as interest on municipal bonds). This is called your “provisional” income.

If your “provisional” income is over the base amount, then a portion of your Social Security benefits would be taxable. Up to 50% of your Social Security benefits are taxable if your provisional income is above $25,000 to $34,000 if you file singly, or above $32,000 to $44,000 for joint filers. If your provisional income exceeds $34,000 (single) or $44,000 (joint), up to 85% of your Social Security benefits are taxable.

In general, distributions from a traditional IRA (not a ROTH) are taxable in the year you receive them, although there are some exceptions. Thus you would need to figure the full amount of your distribution in figuring your provisional income.

Distributions from your 401(k) are different. If you paid into the 401(k), you can exclude part of each payment you receive from taxable income as a recovery of your investment. Your total investment cost includes everything you paid and also includes amounts your employer contributed that were taxable to you when paid. But like all things having to do with taxes, the IRS has pages of mind-bending rules and instructions about how you determine the taxable portion of your distribution.

Here’s an example of how it might work for you if you receive $14,400 from your 401(k) and $5,600 from your IRA. To figure your provisional income, take one - half of your Social Security = $8,000. Let’s say the taxable portion of your 401(k) is $13,200, and of your IRA is the full $5,600. That adds up to a provisional income of $26,800 and a portion of your Social Security benefits would be taxable.

To learn more about taxes in retirement, check these publications from the IRS:

• Tax Guide for Seniors, Publication 554

• Social Security and Equivalent Railroad Retirement Benefits, Publication 915

You can download publications online at To order forms and publications by phone, call: 1-800-TAX-FORM (1-800-829-3676).