Plan withholding and manage your retirement income.
Managing Taxes on 401(k) Withdrawals and Social Security Benefits
When withdrawing funds from your 401(k) while receiving Social Security benefits, it's crucial to understand the tax implications to ensure appropriate withholding and avoid unexpected tax liabilities.
Taxation of 401(k) Withdrawals and Social Security Benefits
Withdrawals from a traditional 401(k) are considered taxable income and are taxed at your ordinary income tax rate. Receiving Social Security benefits may also be partially taxable, depending on your combined income, which includes:
- Adjusted Gross Income (AGI): Your total income minus specific deductions.
- Nontaxable interest: Interest income not subject to federal tax.
- Half of your Social Security benefits.
If your combined income exceeds certain thresholds, a portion of your Social Security benefits becomes taxable. For example, if you're filing as an individual and your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable; above $34,000, up to 85% may be taxable.
Recommended Tax Withholding
To cover potential tax liabilities from both 401(k) withdrawals and taxable Social Security benefits, consider the following withholding strategies:
- 401(k) Withdrawals: Financial institutions typically withhold 20% for federal taxes on 401(k) distributions. However, this may not suffice if your total income places you in a higher tax bracket. You can request a higher withholding rate or make estimated tax payments to cover the shortfall.
- Social Security Benefits: You can opt to have federal taxes withheld from your Social Security payments at rates of 7%, 10%, 12%, or 22% by submitting IRS Form W-4V.
- Social Security Administration
2024 Federal Income Tax Brackets
Additional Resources
For more detailed information, refer to the following IRS publications:
- Taxation of Social Security Benefits
- Retirement Topics – 401(k) and Profit-Sharing Plan Contribution Limits
By carefully planning your withdrawals and understanding the tax implications, you can effectively manage your income and tax obligations during retirement.
