Do IRAs & 401(k)s Affect SS Payments?

Retirement savings don't affect Social Security benefits.

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It can be difficult to figure out whether traditional investments in the markets would best suit your retirement goals, or whether you'd be better off putting that money into retirement plans such as 401(k)s and IRAs. No matter what method you choose to build your nest egg, IRA and employer-plan balances won’t affect your SS retirement benefit.

Determining Your Retirement Benefit

The Social Security Administration considers only two things when it determines the size of your retirement benefit: how much you earned while you worked, and your retirement age. The administration knows how much of your pay has been withheld for Social Security taxes, and it uses this figure to determine your full benefit amount. If you begin drawing your pension early, or if you wait until after normal retirement age, the administration adjusts your benefit accordingly.

Retirement Savings and Benefits

Contributions to a 401(k) or IRA can be claimed as a deduction, effectively allowing you to earn money free of income taxes until withdrawal. But the IRS requires your employer to withhold FICA taxes -- Social Security and Medicare -- on those earnings when you make them. So you don’t need to worry that today’s contributions to retirement accounts are eroding tomorrow’s Social Security benefit. You receive credit for these earnings.

Earnings After Retirement

Whether you’re just looking for a reason to get out of the house or you need to supplement your retirement income, working after you begin taking your Social Security retirement benefit can reduce the amount you receive. Once you’re within a year of retirement age, the administration exempts the first $36,120 in earnings from benefit adjustments. Earnings beyond that threshold reduce your benefit, but slowly: Your weekly check decreases by only $1 for every $3 you earn in wages.

Finding a Balance

Estimating your benefit can be difficult, as it’s based on past years’ earnings as indexed by inflation. Regardless of your life’s earnings, the maximum monthly benefit for a worker who takes his pension at normal retirement age is $2,513 as of 2013. It’s likely that you won’t receive this much. Because of this, you’ll probably need a balanced mix of retirement strategies. Supplementing Social Security pensions with IRAs and 401(k)s provides additional retirement income that won’t derail your pension.