Your IRA Withdrawals Could Be Quietly Reducing Your Social Security Income

A traditional IRA withdrawal can cost more than the tax shown on the distribution itself. It won't reduce your gross Social Security check, but it can make a larger share of that check taxable, leaving you with less spendable income. It's important to understand how this happens in your retirement plan since a routine withdrawal can have a surprisingly large ripple effect.

The IRS uses what is commonly called combined or provisional income to determine whether Social Security benefits are taxable. It generally adds adjusted gross income, tax-exempt interest, and half of annual Social Security benefits. Because the taxable portion of a traditional IRA withdrawal increases adjusted gross income, it can move a retiree across multiple tax thresholds at once.

Retirement income doesn't arrive in separate tax boxes. An IRA distribution can interact with Social Security and other taxable income during the same year, so the cost of taking money out may extend beyond the IRA itself. That's why the most expensive withdrawal isn't always the largest one, it may be the one taken at the wrong time.

IRA withdrawals can change how benefits are taxed

For single filers, Social Security benefits are generally taxed at 50% when combined income exceeds $25,000, and up to 85% of benefits may be taxable once it exceeds $34,000. The comparable thresholds for married couples filing jointly are $32,000 and $44,000. Meanwhile, benefits are not taxed at the federal level when income is below $25,000 for single filers or below $32,000 for married couples filing jointly.

These thresholds aren't indexed for inflation, so more retirees can cross them as benefits, pensions, and other income rise over time. The taxable portion of a traditional IRA withdrawal generally enters gross income dollar for dollar, while withdrawals from a Roth IRA are exempt.

A large withdrawal can trigger the tax torpedo

Imagine taking a traditional IRA withdrawal to replace your roof, renovate your kitchen, buy a vehicle, or help out your adult child. The distribution may be taxable on its own, but it can also potentially pull more Social Security benefits into taxable income if income crosses the $34,000 and $44,000 thresholds for single filers and those filing jointly, respectively.

So in the steepest part of the IRS formula, each additional $1 of income can cause as much as 85 cents of previously untaxed Social Security to become taxable.

Match the account to the expense when possible

Qualified Roth IRA distributions aren't included in gross income, so they generally don't enter the Social Security combined-income formula. That can make Roth funds useful for a large discretionary expense, although nonqualified Roth earnings may still be taxable.

Selling from a taxable brokerage account may offer another option because only the realized gain, rather than the full sale proceeds, generally enters your income. Spreading a large traditional IRA withdrawal across two tax years could also reduce the chance of crossing a threshold all at once.

Consider Roth conversions before RMDs arrive

The years after leaving work but before claiming Social Security or beginning required minimum distributions can create a lower-income planning window. A Roth conversion creates taxable income in the conversion year, but it may reduce the traditional IRA balance that produces future taxable withdrawals.

Under current rules, traditional IRA owners generally begin RMDs at age 73, while original Roth IRA owners don't have lifetime RMDs. Smaller annual conversions may be easier to manage than waiting until Social Security, pensions, and mandatory withdrawals arrive together.

Bottom line

Could one large IRA withdrawal turn an otherwise manageable tax year into a much more expensive one? Before paying for a renovation, vehicle, family gift, or extended trip, estimate both the tax on the distribution and the extra Social Security that could become taxable.

A year-by-year withdrawal plan may help lower your financial stress and preserve more of each benefit check.

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