Reader mailbag: Do IRA Withdrawals Affect Social Security Benefits?

Q: I’m 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 distributions 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 the money and that 85 percent of my Social Security would be subject to taxes if my calculated income is over $44,000. But this is retirement income, not earned income. Will my actual SS 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In a nutshell, are my IRA withdrawals categorized as earned income, where my benefit will be reduced by $1 for every $2 withdrawn?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

A: No, IRA withdrawals won’t affect your benefits. The Social Security Administration (SSA) counts only the wages you earn from a job, or your net profit if you’re self-employed. Income from investments, pensions, annuities, interest, capital gains and so forth are not counted and won’t affect your benefits. If you’re interested in more detail on this, the SSA offers a publication you can download here.

However, Stuart Ritter, a Certified Financial Planner at T. Rowe Price, suggests that you reconsider the decision to start taking benefits at age 62 — and I agree. “Each year that you wait to take Social Security, your benefit will increase 7 percent to 8 percent,” Ritter notes. “The biggest risk most retirees 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 you want to buy today will have doubled when you hit age 85. A higher Social Security benefit could be very valuable in maintaining your lifestyle at that point. Otherwise, you’ll need more of your own money to support the higher withdrawals that you’ll have to take.”

Q: If I take Social Security at age 62, is there a limit to how much money I can make at my job? — V., via the Internet

A. Once you reach your Normal Retirement Age (NRA) — generally 66 or 67 — you can work and earn as much as you like without any reduction in Social Security benefit payments. If you begin receiving benefits when you’re younger and if your earnings exceed a certain amount, some of your benefits will be withheld; $1 will be deducted from your benefit payments for every $2 you earn above the annual income limit, which is $14,160 in 2009. But even then, your lifetime benefits wouldn’t be reduced, because the withheld benefits would be added to your benefits after you reach the NRA. The Social Security Administration offers an online calculator that can help you figure your benefit reductions if you decide to work and collect benefits below your NRA.

Q: I have a question about the $250 economic stimulus payments everyone received in their Social Security checks this year. What no person can tell me, including the IRS and Social Security, is whether this payment will be taxable, added on to our statement of our regular payments from SS, or will an extra statement be sent to cover the $250 if it is taxable? — M., via the Internet

A: Any economic recovery payment you receive during 2009 is not taxable. According to the Internal Revenue Service, the $250 payments are being made to most people who receive Social Security benefits, Supplemental Security Income (SSI), railroad retirement benefits, or veterans disability compensation or pension benefits, and live in a U.S. state, the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, or the Northern Mariana Islands.