When you make withdrawals from your traditional 401k plan, this money is treated as ordinary income. Normally this is not a problem. However, when your 401k plan income reaches a certain limit, you are taxed on your Social Security benefits. You should be aware of the implications, so you can plan accordingly.
When you withdraw money from a traditional 401k plan, it is considered income subject to income tax. This money may affect your Social Security benefits. You must claim the amount of money you receive from your 401k plan on your tax return. In addition, if your 401k plan income exceeds a certain amount, you must include par of your Social Security income on your tax return. From 50 or 85 percent of your benefits may be subject to taxation.
If your income is between $25,000 and $34,000 and you are filing single, up to 50 percent of your Social Security benefits are taxable. If your income is over $34,000, up to 85 percent of your Social Security income is subject to income tax. If you are filing jointly and you and your spouse's combined income is between $32,000 and $44,000, up to 50 percent of your Social Security benfits are subject to tax. If your combined income is over $44,000, up to 85 percent of your Social Security income is subject to income tax.
If your Social Security benefits are taxed, you may end up receiving less money for retirement than you would have if you had left the money in your 401k or if you had reduced withdrawal amounts to below the threshold that made your Social Security benefits taxable.
Instead of making withdrawals during retirement, you might consider converting your 401k plan to a Roth IRA. A Roth plan only accepts after-tax contributions. This means all the money transferred to a Roth account is taxed in the year you convert to a Roth. However, future withdrawals do not count against your Social Security income. Therefore, you might be subject to taxation of your Social Security benefits in the first year of retirement, but you won't be subject to taxation after that.