11 Nov We’re newly retired teachers. Will a 401(k) affect our Social Security?
Q. I am 64 and a retired teacher. I draw a pension and Social Security. My wife is 63 and also gets a pension, plus another small pension from a different job, and she will begin Social Security this month. She has a 401(k) of about $20,000 that she plans to deposit in our savings account. Will the 401(k) deposit affect our Social Security checks and how will we pay taxes on it?
A. Congratulations on your retirement.
Before your wife moves that money, we want to make sure you both understand the possible consequences.
Yours is a common question, said Kenneth Van Leeuwen, a certified financial planner with Van Leeuwen & Company in Princeton.
“The short answer to your question is no, income you receive from a 401(k) or any other qualified retirement plan does not affect the amount of your Social Security retirement benefits,” he said. “But because this withdrawal is considered taxable income, it may cause you to pay income taxes on some of your benefits if your combined annual income exceeds a certain amount.”
In 2020, married couples filing their taxes jointly are required to pay taxes on up to 50% of their benefits if their income is between $32,000 and $44,000, and up to 85% may be taxable if their income exceeds $44,000, he said.
Aside from Social Security, you should also consider that withdrawals from 401(k) plans are taxed as ordinary income so you will owe taxes on the entire $20,000, Van Leeuwen said.
“If you don’t have an immediate need for those funds, it may be in your best interest to avoid withdrawing from the 401(k) until you need the money,” he said. “This allows you to let the assets continue to grow tax-deferred and avoid an increased tax bill for this year.”
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This story was originally published on Nov. 11, 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.