Having been in the business as long as I have, I do my best to answer the questions from my readers that no one else will.
When it comes to retirement, often you have similar concerns, and industry “professionals” are too busy to give a straight, simple answer.
It’s recently come to my attention that one question in particular is giving you trouble.
What lots of people have asked me is: does your 401(k) affect your Social Security benefits?
Well, don’t you want to know the answer?
Simply put, no.
In the way we’re thinking about your 401(k) and Social Security (SS) here, 401(k) contributions become income after you retire, and SS benefits are based on income.
The confusing part comes in when you realize that the income you receive from your 401(k) distributions (or the money that you saved paid out every month after you retire) DOES NOT count towards the income SS calculates.
That’s because SS is based on income other than retirement income, like 401(k) funds.
Instead, it’s calculated from your lifetime earnings, the age at which you begin receiving SS benefits, and your expected lifespan.
Whether that helps your hurts you in terms of retirement income depends on your situation, but we’re not done yet.
What’s worse about this whole system is once you get over the hurdle of what money belongs where, then you have to figure out who gets to tax it and for how much.
Even I get tripped up here sometimes, and so it’s important for me to know that you have this information laid out in a simple way that’s all in one place.
Let’s start at the beginning.
Depending on what kind of retirement funding tool you use, whether it’s a 401(k), IRA, or some other account, often they use distinctions like “Traditional” or “Roth.”
This is important: which kind of account you have determines what kind of taxes you pay. And then we throw Social Security into the fray.
In basic terms, a traditional investment savings platform allows you to contribute money on a tax-free basis, and then levies the appropriate tax upon your withdrawals from that account.
Its counterpart, a Roth account, is the opposite. You pay the appropriate taxes at the time you put the money in, and are able to withdraw it tax-free at a later date.
You have to pay income taxes on some of your SS benefits if you and your spouse’s combined annual income is higher than a certain threshold.
So, for example, if you take large amounts from your 401(k) one year, you are more likely to exceed the income threshold and increase the amount of taxes you’ll most likely have to pay for that year.
That’s on the back end.
Contributions (the money you SAVE for retirement), are subject to SS and Medicare taxes but NOT income taxes unless they are for a Roth account.
So, now that we’ve broken that down, I hope your mind is at ease on retirement questions for now.
I really do love to take the opportunity to speak to you, and answer your questions on a more personal level.
That’s why I take one weekend out of every year to meet with you, and host a wonderful summit that stockpiles useful information like this into 2 days.
This year we’ll be meeting up in Vegas…I hope you’ll take this opportunity to come with questions and excitement.
If you’re interested in meeting me at our Annual Wealth Summit, you’re in luck.
Tickets went on sale November 1st, and they’re going fast. To claim your seat, click here.
In the time leading up to our event, think of all the things you’d want to ask me, or my colleagues for that matter!
We’re getting ready to put on quite the show for you, and our favorite part is turning your questions into answers.