Does My 403(b) Reduce My Social Security Benefits?

Does your 403(b) affect Social-Security income? Well, it does in some ways. And it does not affect it in other ways.

Usually, your total retirement income, which may include your 403(b), will not affect your Social Security income. However, it will affect the taxes you pay, thus determining how much money you end up with. In addition, your Social Security taxes may affect your 403(b) contributions and earnings in the long term.

For this reason, you must learn how the two relate and in what ways they are different. That way, you can ensure you maximize both your 403(b) and Social Security benefits when you retire.

Your Social Security income will help cushion you from poverty when you are elderly. It will also shield you financially when you become disabled or lose a bread-winning spouse. How much you earn will depend on various factors. Your withdrawals from your 403(b) do not directly affect the amount of your benefits. But the following factors do:

You must work for a minimum of ​10 years​, during which you must earn at least ​40​ Social Security credits to qualify for benefits. However, those working years don’t have to be consecutive. In addition, for people receiving spousal benefits, these credit qualifications don’t apply. So, even if you have never worked, you can still receive your spouse’s benefits.

Of course, you can work for longer than that. That’s because your Social Security benefits are calculated based on a maximum of ​35 years​ during which you worked and earned the highest income.

If you work less than 35 years in total, during those years you do not earn an income and pay Social Security taxes; your earnings will be factored in at zero. So, you will end up getting fewer benefits than if you had worked for the maximum period.

One of the main reasons your income affects Social Security benefits is because it determines the taxes you pay into the program to a significant extent. Here’s how it works:

You can accumulate up to four Social Security credits annually to qualify for Social Security within 10 years. Currently, each credit is worth ​$1,470​. So you need to earn an average of ​$5,880​ to get the required four annual credits for 10 years (assuming the set amount doesn’t change).

In addition, more of your income can be subject to Social Security tax. Currently, the taxable income stands at ​$142,800​, but it changes over time.

Those who pay more taxes of this kind tend to receive more Social Security benefits after retirement than those who pay less. If you can hit the maximum taxable amount each year for 35 years, you will likely get the maximum Social Security benefits possible.

The age at which you begin to access your Social Security benefits also affects the amount you receive. If you can, you should wait until the full retirement age to start accessing your benefits.

The full retirement age depends on when you were born. For example, for anyone born between ​1943 and 1954​, the full retirement age is ​66 years​. And for anyone born between ​1955 and 1959​, the full retirement age increases progressively by ​two months from 66 years​.

In addition, for those born in ​1960 or later​, the full retirement age is ​67 years​. However, you can begin enjoying your Social Security benefits from the age of ​62 years​.

However, if you choose to access your Social Security benefits before your full retirement age, you will receive less money. The reduction could be as high as ​30 percent​ by 2022. Also, if you wait beyond your full retirement age to receive your benefits, the amount you receive will increase by ​8 percent​ for each year you delay.

Your Roth 403(b) after-tax contributions are subject to federal, state and Social Security (FICA) taxes.

In addition, your 403(b) distributions are usually considered taxable income except those within Roth accounts. That’s because pre-tax dollars fund the non-Roth distributions. What you pay will be based on ordinary income tax rates. So, you should prepare for your distributions to be taxed, not just at the federal but also state level.

However, not all states will tax your 403(b) retirement income. That includes all states without income taxes, such as Alaska, New Hampshire, Texas and Washington. Others include Tennessee, Florida, Nevada, Wyoming and South Dakota.

Your 403(b) income may not affect the amount you receive in Social Security benefits. But it has a direct bearing on the total taxes you pay during retirement, including those associated with your benefits. So, it can significantly reduce the overall amount of benefits you enjoy from Social Security.

The federal tax rate on your benefits depends on the total amount of retirement income you earn annually and the percentage of benefits affected. The rate is ​50 percent​ if:

• You are an individual making a combined income of ​between $25,000 and $34,000​.
• You are part of a married couple earning a combined income of ​between $32,000 and $44,000.​

The tax rate may affect as much as ​85 percent​ of your benefits if:

• You are an individual making a combined income of more than ​$34,000.​
• You are part of a married couple earning a combined income of more than ​$44,000​.

The chances are that your Social Security benefits will not exceed the set limits on their own. However, when you factor in your 403(b) retirement benefits, you may hit the limits. And once that happens, you will have to pay taxes on your Social Security income. The amount you pay, though, will depend on the combined retirement income you end up with.

Your 403(b) and Social Security benefits are intertwined. If you opt to invest in a 403(b) account funded by after-tax dollars, then your FICA taxes will affect your long-term earnings. However, your pre-tax accounts will be unaffected.

On the other hand, your Social Security income is generally independent of your 403(b) income. But it may be subject to taxes that depend on your other retirement distributions, including those from your 403(b) income. So, think carefully about the tax implications when withdrawing your retirement income.