Having a hefty sum set aside in a 401(k) makes a literal wealth of financial choices possible. But take out too much money at once, and you’ll soon find Uncle Sam’s IRS eagle poking his beak into your nest egg.
So if, say at 67, you decide to finance your devoted son’s 20% down payment on his first home, priced at $425,000, does that mean the government reserves the right to demand its share several times over?
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Here’s how this works: The government monitors your taxable income — and retirement account distributions are part of that.
Depending on the amount you withdraw, part of your income could land in a higher marginal tax bracket — and no, your neighborhood IRS agent doesn’t care whether you’ve stopped working.
Income thresholds extend to Medicare, too. Exceeding a certain modified adjusted gross income can cause a spike in your premiums. That means you could end up paying for that withdrawal more than once.
But is there a way to ensure it doesn’t happen again?
The answer depends on how savvy you are with your finances.
Let’s say you collect a monthly Social Security check of $1,925, the average for retired workers as of November 2024 — which comes to $23,100 annually.
Since you’re still in your 60s, you aren’t yet required to withdraw money out of your retirement accounts each year.
So if that $23,100 is your only income — and it’s enough to live on — and you file as a single, individual taxpayer, you won’t pay any federal taxes. The IRS only starts claiming tax on Social Security when 50% of your benefit for the year and any other income combined totals more than $25,000.
But if you pull out $85,000 for that down payment for your son, things change. The IRS formula for taxing Social Security would add half of your benefit to the $85,000, which comes to $96,550. That means you’d exceed the $34,000 threshold where up to 85% of your benefits will be taxed. Ouch.
Now see if you can follow this, non-accountants: 85% of $23,100 means $19,635 of your Social Security benefits is taxable, which added to your $85,000 withdrawal gives us $104,635 of taxable income for the year.
