The Social Security Administration does not count traditional IRA distributions as income in calculating your annual benefit amounts, but the Internal Revenue Service does count the same distributions in figuring your tax liability. Neither agency counts Roth IRA distributions as income. But be careful about converting a traditional IRA to a Roth if you are already drawing Social Security. Not only will you pay tax on the conversion amount, it will probably cause you to pay tax on your Social Security benefits, too.
Social Security's Version of Income
If you begin collecting Social Security benefits early, the SSA will reduce your benefits if your "earned" income exceeds the earnings limit — $14,640 for 2012, but it can be adjusted annually. The SSA factors in wages from a job or net profit from self-employment, as well as bonuses, commissions, vacation pay, sick pay — everything reported on your W-2 statement — as well as tips or other compensation, such as royalties, not reported by an employer. IRA distributions — also pensions, annuities, interest and dividends — simply do not count.
IRS Version of Income
In determining whether your Social Security benefits are subject to income tax, the IRS uses "combined" income. To figure your combined income, start with your adjusted gross income, and then add your nontaxable interest and dividends plus half of that year's Social Security benefit amount. Adjusted gross income includes IRA distributions from a traditional, tax-deferred IRA account, as well as IRA conversions and withdrawals from a workplace retirement plan, such as a 401(k). If your combined income for 2012 falls between $25,000 and $34,000, up to half of your Social Security benefits may be taxable. Over $34,000 triggers an 85 percent tax liability. The income thresholds increase to $32,000 and $44,000 on a joint return. The income parameters can be changed annually.
Roth IRA Distributions
Roth IRA distributions do not affect your Social Security benefits in any way. Not only are they not considered earned income by the Social Security Administration, they are not included in your adjusted gross income in determining combined income by the IRS.
Social Security Tax Liability
At no point will you need to pay Social Security or Medicare taxes on IRA distributions. Regardless of whether the IRA was funded with pretax contributions in a traditional IRA or in an IRA rolled over from a workplace retirement plan, or if it was funded with after-tax contributions in a Roth, the Social Security taxes on the money already were paid.
- Internal Revenue Service: Publication 915, Social Security and Equivalent Railroad Retirement Benefits
- Tax Guide for Investors: Tax on Social Security
- Social Security Administration: Effect of IRA withdrawals on Social Security benefits
- AARP: Earnings Limit to Rise in 2012
- Internal Revenue Service: Are Your Social Security Benefits Taxable?