If your income is high enough, it can turn Social Security payments taxable. This can hit you whether you receive Social Security retirement or disability benefits. If you start withdrawing money from a traditional IRA, that counts toward the income level at which taxes kick in, just as if you'd received the money as wages.
The Social Security Administration has a simple formula for testing whether your benefits are subject to income tax. Figure your adjusted gross income for the year. Add any nontaxable interest. Then add one-half your year's benefits. As of early 2013, if the total is between $32,000 to $44,000 and you file a joint return, 50 percent of your benefits are taxable; above $44,000, 85 percent are taxable. For a single filer, the key figures are $25,000 for 50 percent of your benefits to be taxed, and $34,000 for 85 percent to be taxed.
You only include IRA withdrawals in your AGI when you pay tax on them. If your withdrawals come from a Roth instead of a traditional IRA, they're tax-free, so they're not part of your taxable income. If you contributed after-tax dollars to a traditional IRA, that money is also tax-free when you withdraw it. It doesn't affect Social Security either. If 20 percent of your IRA consists of after-tax dollars, the IRS treats roughly 20 percent of your withdrawals for the year as tax-free.
If you take money out of a tradtional IRA after you turn 59 1/2, you pay tax on the money as regular income. Any younger than that and you pay income tax plus a 10 percent tax penalty -- but being disabled allows you to waive the penalty. You qualify as disabled if your mental or physical health problems bar you from "substantial gainful activity" and if your condition is terminal or is going to last a long and indefinite period.
Because Roth withdrawals don't affect your benefits, some people choose to convert their traditional IRA to a Roth. If you convert a $20,000 traditional account to a Roth, you pay income tax on the money you convert, except the after-tax part. You pay nothing when you withdraw a conversion from the Roth, provided you wait at least five years. If you can wait that long, it can be an effective strategy for minimizing Social Security taxability.
- Boston.com: IRA Distributions and Taxable Social Security Benefits
- Financial Web: Are Social Security Disability Benefits Taxable?
- Social Security Administration: Income Taxes and Your Social Security Benefits
- Internal Revenue Service: Traditional IRAs
- New York Times; New Rules Ease Roth Conversions But Benefits Vary
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.