An individual retirement account offers multiple tax benefits, depending on the type of account that you open. Traditional IRAs allow you to defer taxes on your contributions and investment gains in the account until retirement. A Roth IRA provides money at retirement that is completely tax-free. Withdrawals from either of these accounts are not subject to Social Security tax at retirement. However, some IRA withdrawals can affect the tax status of your Social Security benefits.
Contributions Already Taxed
Although money you put into a traditional IRA is described as a before-tax contribution, you have already paid Social Security taxes on the contributions. You deduct for a traditional IRA contribution on Form 1040, line 32 as an adjustment to your income. This reduces your income tax, but it does not reduce any Social Security taxes withheld by your employer, or any self-employment Social Security taxes. Roth IRA contributions also don't reduce your Social Security tax. Money that goes a Roth account is subject to income tax when it is earned, and it's not shown on your tax return as a deduction.
Disbursements, or withdrawals, from your Roth or traditional IRA are shown on your Form 1040, line 15a, or Form 1040A, line 11a. The taxable amounts are listed on line b, and they're added into your taxable income. The income tax is figured on the taxable income in a later section of the form, but no Social Security tax is charged on these disbursements, taxable or non-taxable.
Traditional IRA at Retirement
Some of your Social Security benefits becomes taxable if your income exceeds certain thresholds. Add 50 percent of the Social Security benefits that you receive in a year to your total yearly taxable income. If that amount is more than $32,000 if you are married and filing jointly, or $25,000 if single, at least a portion of your Social Security benefits is taxable. Traditional IRA distributions increase your taxable income, so taking money from your traditional IRA could make your Social Security benefits taxable.
Roth IRA at Retirement
A Roth IRA distribution is tax-free at retirement, provided the account has been open five years or longer. Therefore, Roth distributions will not make a portion of your Social Security benefits taxable. This could have a significant impact on the value of a Roth IRA as a retirement tax-planning tool.