Will my Social Security be lowered if I take from my 401(k)?

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Q. If I start taking Social Security at age 62, is there a ceiling on what I take out of my 401(k) for the year? I know that if I work there is a ceiling of approximately $18,000 before Social Security starts taking money back, but does that apply to disbursements of my 401(k)?
— Planning

A. Let’s go over the rules.

At the age of 59½, withdrawals can be taken from retirement accounts such as a 401(k), traditional IRA or 403(b) without a penalty, said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge.

But, she said, but these distributions are not considered income and therefore will not be included in the calculation that Social Security uses to determine what portion of your benefit will be withheld.

It’s important to note that there is no Required Minimum Distribution (RMD) when withdrawals are taken prior to age 72 and you can distribute whatever is needed to meet your expense needs. The SECURE Act, which was enacted at the end of 2019, modified the RMD date from age 70 ½ to 72, Mott said.

“For those who file for Social Security prior to full retirement age (FRA), the annual earnings limit for 2020 is $18,420. Benefits are reduced $1 for every $2 earned over and above that limit,” Mott said. “The Social Security Administration defines income as wages and after-tax self-employment income.”*

However, she said, in the year you reach FRA, the amount you could earn jumps to $48,600 and the benefit reduction is $1 for every $3 earned above the threshold.

Once you attain full retirement age, there is no reduction in your Social Security benefit, but be aware that you may be subject to income taxes on up to 85% of what you receive, Mott said.

As a single filer, combined income — earnings, retirement payments, half your Social Security and tax-exempt interest — which exceeds $25,000 will be subject to some amount of tax. For joint filers, the income limit is $32,000, she said.

“If you haven’t taken the time to look at your overall financial need, this may be something to consider before starting either Social Security or withdrawing from your 401(k),” Mott said. “By filing for Social Security at age 62, your benefit will be permanently reduced by 25% for your lifetime. This will also impact any future spousal or survivor benefits.”

If your income is not meeting your needs, taking a small distribution from the 401(k) to enable you to cover your expenses may be a better strategy thus allowing you to hold off filing for Social Security until your reach Full Retirement Age, she said.

Another factor to consider is how these distributions will impact your overall income picture as this could alter that amount you must pay for Medicare, Mott said.

“Medicare uses a two-year look back to determine whether an additional premium will be paid by each individual and couple,” she said.

For 2020, the individual income limit based on 2018 tax data that will avoid IRMAA — Income Related Monthly Adjustment Amount — is $87,000 and $174,000 for a married couple filing jointly.

“While this may not be an issue immediately, you should be aware of the additional premiums that might impact the cost of your Medicare Part B and Part D when you attain age 65 and qualify to receive it,” Mott said. “Your tax professional should be able to provide guidance on the right amount of tax to withhold on your retirement account distributions, how the income will affect your tax rates and what your overall income picture may look like for future Medicare planning purposes.”

* The original version of this story mistakenly characterized how Social Security counts income. 

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This story was originally published on Oct. 7, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.