If you’re nearing retirement, consider exploring how to optimize your income streams, particularly Social Security benefits and IRA distributions. Both are important factors of retirement planning. Knowing how they work together for taxes can help you keep more of your income and avoid expensive surprises.
This article looks at whether combining Social Security and IRA distributions can provide tax benefits. It also examines how this strategy may impact required minimum distribution (RMD) planning.
Understanding the basics: Social Security and IRA distributions
Social Security benefits are typically available starting at age 62, though delaying benefits until a full retirement age of 67 (or even age 70) can increase your monthly payout. IRA distributions, on the other hand, are generally taxable and must begin by age 73 (in 2025 and 2026) under the RMD rules for traditional IRAs.
The key difference lies in how these income sources get taxed. Social Security benefits may be partially taxable depending on your “combined income,” which includes your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits. Taking traditional IRA distributions increases your AGI, which can push more of your Social Security benefits into the taxable range.
IRA withdrawals and Social Security taxation
The IRS uses combined income to determine how much of your Social Security benefits are taxable.
Traditional IRA distributions increase your AGI, which can push you into higher combined income brackets. Roth IRA distributions, however, do not count toward AGI and therefore do not affect Social Security taxation.
Combined income and taxation of Social Security
This chart shows the Social Security tax thresholds for combined income.
Filing Status |
Combined income range |
Taxable portion of benefits |
|---|---|---|
Single, Head of Household, or Qualifying Widow(er) |
Less than $25,000 |
0% |
Married Filing Jointly |
Less than $32,000 |
0% |
Example:
Linda is aged 68 and retired. She receives $24,000 per year in Social Security and withdraws $30,000 per year from her traditional IRA account. Her combined income equals $42,000 based on this calculation: $12,000 (half of Social Security) + $0 from nontaxable interest + $30,000 AGI from traditional IRA. Since Linda is single, and her combined income is above $34,000, up to 85% of her Social Security is taxable. So, there will be taxes on $20,400 of Linda’s income. If her combined income was less than the $25,000 threshold, none of her Social Security would be taxable.
Can mixing these income sources offer tax benefits?
The answer is yes, if there’s a solid Social Security and IRA tax strategy. The goal is to manage your income in a way that minimizes the taxation of Social Security benefits while meeting your spending needs and complying with RMD rules.
- Timing IRA distributions
One strategy to consider is delaying Social Security benefits while drawing down IRA assets early in retirement. This approach can reduce your IRA balance before RMDs begin, potentially lowering your future RMDs and the associated tax burden. It also allows your Social Security benefits to grow, as delaying them increases your monthly payout by up to 8% per year after full retirement age.
Let’s say, hypothetically, that you retired at age 62 and delayed Social Security until age 70. You could use IRA withdrawals to cover living expenses during the gap. Because you wouldn’t yet be receiving Social Security, your combined income might be lower. IRA withdrawals would potentially incur less taxes.
- Using Roth conversions
Another powerful tactic is converting traditional IRA funds to a Roth IRA before RMDs begin. Roth IRA distributions are not included in AGI and do not affect the taxation of Social Security benefits.
Roth conversion strategies for retirees during low-income years, such as the gap between retiring and taking Social Security, could help reduce future RMDs. They may help to avoid pushing your Social Security benefits into higher taxable brackets.
However, Roth conversions are taxable in the year they occur, so careful planning is essential. At Mercer Advisors, we can help clients “fill up” lower tax brackets without crossing into higher ones.
- Performing Qualified Charitable Distributions (QCDs)
If you’re age 70 ½ or older, QCDs allow each individual to donate up to $108,000 annually (adjusted for inflation in future years) from your IRA directly to a qualified charity. These distributions count toward your RMD but are excluded from your taxable income, helping reduce the impact on your Social Security taxation.
This strategy is especially useful if you’re charitably inclined and want to minimize tax exposure.
Factoring in RMDs
RMDs are mandatory withdrawals from traditional IRAs starting at age 73, or age 75 for those born after 1960. These distributions are fully taxable and can significantly increase your AGI, potentially triggering higher taxes on Social Security benefits.
If you were to delay Social Security and reduce your IRA balance through early withdrawals or Roth conversions, your RMDs may be smaller, reducing the tax impact. Conversely, if you were to allow your IRA to grow unchecked, your RMDs could be large enough to push your Social Security benefits into the 85% taxable range.
Strategic planning tips
- To help with retirement income tax optimization, create a timeline for when you’ll begin Social Security, IRA withdrawals, and other income sources. This helps identify low-income years that are ideal for Roth conversions or early IRA withdrawals.
- Calculating combined income, Social Security tax and projecting impacts can be complex. Consider using a tax specialist or financial advisor for personalized guidance.
- Married couples should consider IRA distribution timing strategies along with taking Social Security to maximize tax efficiency, while also accounting for other income sources like pensions, annuities, and investments.
- Finally, stay informed about legislative changes, under laws like the SECURE Act RMD rules, to help ensure your retirement plan remains effective.
Getting help
Mixing Social Security and IRA distributions can be a smart way to manage retirement income, but it requires thoughtful planning. The interplay between AGI, combined income, and RMDs means that even small changes in timing can impact tax efficient retirement withdrawals.
You are encouraged to work closely with your Mercer Advisors wealth advisor to develop a customized strategy that aligns with your goals, lifestyle, and tax situation.
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Whether it’s delaying Social Security, converting to Roth IRAs, or leveraging QCDs, the right mix can help you keep more of your retirement income and have greater financial confidence.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. Hypothetical examples are for illustrative purposes only.
Tax preparation and tax filing are a separate fee from our investment management and planning services.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER® certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
