Reader Q&A: IRA withdrawals and taxes
Posted on 26 June 2009
Permanent URL of this article: http://retirementrevised.com/money/reader-qa-ira-withdrawals-and-taxes
Q: I am anticipating signing up for Social Security benefits late this year or early next year as I will soon be 62. I rolled my lump sum retirement over into an IRA. When I begin taking distribution from my IRA, will my Social Security benefit be affected, since I am not yet full retirement age? I realize I will owe taxes on it and that 85 percent of my Social ecurity would be subject to taxes if my calculated income is over $44,000. But this is retirement income, not earned income. Will my actual benefit be reduced? In a nutshell, are my IRA withdrawals categorized as earned income where my benefit will be reduced by $1 for every $2 withdrawn?
–L.L., via the Internet
The answer, from Stuart Ritter, Certified Financial Planner at T. Rowe Price:
First, the direct answer to his question – and I’m just going to include the actual text from the Social Security Administration website addressing this exact issue:
No. We count only the wages you earn from a job, or your net profit if you’re self-employed. Non-work income such as pensions, annuities, investment income, interest, capital gains and other government benefits are not counted and will not affect your Social Security benefits. For more information, we suggest that you read the following publications which are available online: Retirement Benefits (Publication No. 05-10035) and How Work Affects Your Benefits (Publication No.05-10069).”
More importantly, the reader should reconsider starting his Social Security benefits at age 62. Each year that he waits to take it, his benefit will increase 7 percent to8 percent. For most retirees, the biggest risk they face is longevity risk–having enough income later in life to maintain their lifestyle given the significantly higher costs they’ll potentially face for health care, food, utilities, etc. (at just 3 percent, the cost of everything he wants to buy today will have doubled when he hits age 85). A higher Social Security benefit could be very valuable in maintaining his lifestyle at that point. Otherwise, he’ll need more of his own money to support the higher withdrawals he’d have to take.
Related posts:
- Reader mailbag: Allocations, Social Security taxes and Roths
- Reader mailbag: Roth IRAs, Social Security and IRA withdrawals
- Reader mailbag: Rules for Roth IRAs, minimum withdrawals
- Reader mailbag: Do IRA Withdrawals Affect Social Security Benefits?
- Reader mailbag: IRA beneficiaries and Medicare first payors
November 21st, 2009 at 1:26 am
I disagree with the concept of waiting to FRA to collect SS. I would like to retire early, while I am healthy enough to enjoy doing activities which may require good health. Most people in my family do not live beyond their mid 70s. Also, if I had a million dollars and waited to retire, I would still be one health issue from the poorhouse. I would not wish to take the risk of retiring late, working a job I hate for four more years, then get sick and give all my money to the health care profiteers. an alternative would be to retire @ 61 and live on 401K money for 2 years and declare to SS to delay receiving benefits until 63 or 64 as a mid point compromise. There is a legal term and form you fill out with SS to declare retirement but defer benefits. Bottom line; My uncle sits in a chair or sleeps all day, craps in his “depends”,and does not know what planet he is on. You should try to strike a balance between maximizing benefits and QUALITY of life. I would rather retire young, enjoy some good years, before my “stroke”. Then, if I am drooling all over myself, crapping in my pants,and don’t know what planet I am on. I won’t know if I am poor. If I am not poor, the health care industry will make sure I am poor. Thanks for the opportunity to express my disagreement with all the “financial Planners” who think one dimensional, overlooking Quality of life issues. I also thank anyone who reads this.
November 21st, 2009 at 7:59 am
Gerald: bottom line, if you’re that sure you won’t live very long you’re correct to take Social Security early. But, for people who meet or beat the longevity averages, waiting to full retirement age is the way to go, because it provides a baseline of security that keeps millions out of poverty in old age. This isn’t just the opinion of “financial planners,” but every smart expert I’ve ever interviewed in this field.