Are IRA Retirement Payouts Subject to the Social Security Tax?
In the United States, the Internal Revenue Code exempts individual taxpayers from payment of certain earnings-based taxes, including Social Security and Medicare, and distributions from qualified retirement plans, such as 401(k) accounts, individual retirement accounts (IRAs) and Roth IRAs. Taxpayers, however, may still be liable for individual income tax on the amount of the distribution.
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FICA tax
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In the United States, taxpayers must contribute 12.4 percent of earned income to Social Security's trust fund. Typically, one-half of this amount is withheld from employee paychecks and one-half is funded by employers. This is known as FICA (Federal Insurance Contributions Act) tax. High-earning individual taxpayers are not required to pay additional tax after reaching a certain income level. FICA tax is payable only upon wages and net profits from self-employment and never from retirement account distributions.
Medicare tax
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Similar to FICA tax, taxpayers are required to remit 2.9 percent of earned income to Medicare's Hospital Insurance program. Of this amount, 1.45 percent is withheld from employee paychecks while employers fund the remainder. Unlike FICA, the amount of Medicare tax is not limited for high-earning individual taxpayers. Medicare tax is payable upon wages and net profits from self-employment and is not paid on distributions from retirement accounts.
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Contributions
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Both FICA and Medicare taxes are due for earnings or net profits contributed to qualified retirement accounts. Taxpayers contributing funds to traditional IRAs and 401(k) accounts are allowed a deduction from the amount of taxable income. This deduction is for individual income tax purposes only. Taxpayers may not use the deduction to reduce the wage base for FICA or Medicare taxes. With Roth IRAs, all contributions are made after tax, subsequent to payment of both income tax and FICA and Medicare taxes.
Reporting to the IRS
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Retirement plan administrators are required to report the amount of most IRA distributions to the Internal Revenue Service (IRS) via Form 1099-R. A copy of this form is sent to the retirement account holder. The retirement account holder is required to report both the gross amount of the distribution and taxable amount of the distribution on Form 1040, U.S. Individual Income Tax Return. Certain IRA distributions, such as Roth IRA rollovers, must be reported to the IRS via Form 8606, Nondeductible IRAs.
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