Your 401(k) withdrawals don’t count as earned income. Likewise, your Social Security income is not considered earned income either. In reality, neither 401(k) distributions nor Social Security benefits qualify as earned income since they don’t stem from wages you earn while working for someone else or running your own business when you receive them.
What Are Social Security Benefits?
Social Security refers to a federal government program that benefits retirees and older people with low incomes. You have a right to some of these benefits, whether wealthy or poor, so long as you worked, paid into the program and met the set criteria.
However, Social Security benefits are capped, which means that the wealthier beneficiaries will only receive so much before the limits are applied. You may also have access to Social Security benefits if you did not pay into the program but have a spouse who is qualified to get them. However, not everyone is eligible for Social Security.
Do bear in mind that you can receive Social Security benefits while working. And there are no limitations on how much you can earn. However, if you are younger than the full retirement age and receive money exceeding the specified amount, you will receive fewer benefits.
The reduction will be made at a rate of $1 for every $2 you earn over the limits set. But the moment you hit your full retirement age, your benefits will increase to make up for the previously withheld benefits.
If you have no idea of how much you will earn in Social Security, you can use various online calculators to obtain estimates. Then you can decide whether to apply for your benefits early or wait for a bit longer.
Social Security income should be supplementary to bridge the gap between other forms of retirement income, such as 401(k) and pension income, and your needs as you grow older. However, you cannot rely on these benefits as the only retirement income.
Do 401(k) Withdrawals Count as Income For Social Security?
Both Social Security and 401(k) are sources of retirement income. But whereas you can begin withdrawing from your 401(k) accounts at 59.5 years of age, you must wait until you are at least 62 years to start receiving Social Security benefits. Of course; there are exceptions to these rules, such as for a disability. However, when all other factors are constant, these rules tend to apply.
In addition, what you make under each program depends on different things. For example, in your 401(k), your contributions, accrued interest and underlying investment types will affect how much income you can get when you withdraw. Taxes will also affect the amounts you end up with.
However, for Social Security, the age at which you elect to begin receiving the benefits and your total work earnings will determine how much you receive.
Therefore, 401(k) withdrawals are independent of Social Security benefits. So, your 401(k) withdrawals do not count as income for Social Security. Your ability to earn a retirement income from one source doesn’t affect your ability to earn income from the other. If you are eligible for both retirement income sources, you can receive money from both.
How 401(k) Affects Your Social Security Benefits
Since the 401(k) holds tax-deferred money, you will need to pay taxes during withdrawal. Social Security benefits are also taxable. But the taxable portion varies depending on your total retirement income.
Typically, anyone who files as an “individual” and the combined retirement income is between $25,000 and $34,000, or between $32,000 and $44,000 as a couple filing jointly, may have to pay up to 50 percent taxes on Social Security benefits. Those earning more than $34,000 as an individual, or $44,000 as a couple, may have to pay up to 85 percent in taxes.
So, while your 401(k) withdrawals will not affect how much you earn in Social Security benefits, they will affect the amount of taxable Social Security benefits.
The more money you withdraw from the 401(k) and other retirement accounts, the higher your total retirement income will be. And when that income hits the specified limit, you may end up losing a significant chunk of your Social Security benefits to taxation.
Is 401(k) Earned Income When Claiming Unemployment?
If you are elderly and currently unemployed but don’t want to access your Social Security benefits just yet, you can consider withdrawing from your 401(k). But in some states, such as California, your withdrawals may be considered as income. That, in turn, will affect your unemployment.
However, due to the COVID-19 pandemic, special measures have been put in place to help you out. Under the CARES Act, you may be able to withdraw as much as $100,000 penalty-free if you are eligible.
- IRS: ITG FAQ #2 Answer-What income is considered earned income?
- IRS: Earned Income and Earned Income Tax Credit (EITC) Tables
- CFI: Social Security
- USA Today: Do billionaires get Social Security?
- SSA: How Work Affects Your Benefits
- NOLO: Will I Get Penalized for Working While Collecting Social Security Retirement?
- SSA: Benefit Calculators
- FindLaw: Social Security vs. 401k
- USA Today: Just started collecting Social Security? Here's how to know whether you'll owe taxes on it
- AARP: How is Social Security taxed?
- CNBC: Here’s what you need to know about a Covid-related distribution from your 401(k) before filing that tax return
I hold a BS in Computer Science and have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.