Q & A: October 2019

Q & A: October 2019

How Do Distributions From a 401(k) Affect my Social Security Benefits?

Q:  I’m 62 and doing some retirement planning.  Can you tell me how distributions from a 401(k) would affect my Social Security benefits?  Does the Social Security Administration use income from a 401(k) to calculate benefits?  Would income from a 401(k) cause my Social Security benefits to be reduced?

A:  The Social Security Administration (SSA) does not use distributions from any type of retirement account (IRA or 401(k)) in calculating your initial retirement benefit.  Your benefit is based on your earnings and wages record reported by your employers over your working years.

When you file a claim for benefits, the SSA will use your top 35 years of earnings to determine your benefit.  If you have taken time out of the workforce to start a family or provide caregiving for an older family member, your record may show a gap for years when you had no earnings or low earnings.  It’s important for you to get a copy of the earnings history that the Social Security Administration has on file for you.  You can get that when setting up an online mySocialSecurity account at https://www.ssa.gov/myaccount/.

Continuing to work past age 62 is especially important if you have a short work history, or years in which your earnings were low due to working part time.  Working an additional five years could potentially translate into significantly higher Social Security income over the course of a retirement, and might also give you additional years to contribute to a 401(k).

The Social Security Administration has “earning restriction” rules that limit the amount you may earn in wages and still receive benefits when you are under your full retirement age.  Those rules, however, do not apply to distributions from retirement accounts like a traditional IRA, Roth or 401(k).  Assuming you have held your 401(k) long enough, you may take distributions that will not reduce your Social Security benefits.

Starting Social Security benefits before your full retirement age (which in your case is 66 and 6 months), however, would permanently reduce your Social Security benefits by roughly 25%.  Thus, it would be to your advantage to delay starting Social Security until you are at least 66 and 6 months to avoid reductions.  And once you turn your full retirement age, if you continue to delay starting Social Security, your benefit continues to grow by 8% per year until age 70.

Distributions from traditional IRAs and a 401(k) are subject to taxation, and that income can also subject your Social Security benefits to taxation as well.  To determine if your Social Security benefits are taxable, use your adjusted gross income, add nontaxable interest and dividends plus half of your Social Security benefits.  If your combined income is $25,000 or more (single) or $32,000 or more (joint) up to 85% of Social Security benefits could be taxable.

Since you have a 401(k), you may want to ask your company if the administrator of the plan offers help with retirement planning.  If that’s not available, check your local senior center, library, or even community college to learn of workshops on retirement planning in your area.  The Social Security Administration website (https://www.ssa.gov) is full of information that would greatly assist with your planning.