Are IRA Withdrawals Subject to Social Security Tax?

by Fraser Sherman, Demand Media Google

    Almost everything you earn is subject to Social Security and Medicare taxes, and your IRA contributions are no exception. Although the amount you deposit in the account is deductible on your Form 1040, you still have to pay "FICA taxes" -- Social Security and Medicare -- on the money. When you withdraw IRA funds as retirement income, however, things are different.

    Withdrawals

    In most ways, money you take out of your IRA is just like your wages. At the end of the year, the account manager tells you how much you made. You then report the income on your 1040. The big difference is that you don't pay FICA taxes on your IRA withdrawals. If you freelance in retirement and earn $10,000, you pay 13.3 percent for Social Security and Medicare, as of 2012. If you withdraw the same amount from your IRA, there's no FICA due.

    Roth IRA

    Unlike contributions to a traditional IRA, contributions to a Roth IRA are not tax-deductible, but withdrawals are tax-free. As with a traditional IRA, you pay FICA tax on your contributions, but not on your withdrawals. CBS News says one supposed benefit of a Roth is that if income taxes go up in the future, a Roth comes out ahead of a traditional account: You've already paid taxes at today's rate. If, however, the government raises FICA taxes to support Social Security and Medicaid and leaves income tax rates alone, that advantage disappears.

    SEP-IRA

    A SEP-IRA combines the benefits of a workplace retirement plan with an individual retirement account. Your employer sets up an IRA for you, then contributes to it. The money isn't counted as part of your wages, so neither you nor your boss have to pay FICA taxes. When you take money out, all you pay is income tax, just like a regular IRA. The only time FICA comes into play is if you're self-employed and set up an SEP. In that case, you have to pay FICA.

    Social Security Benefits

    While IRA withdrawals aren't subject to Social Security tax, they can make your Social Security benefits taxable. You don't normally pay tax on benefits, but that changes if you have added income. Take half your Social Security income for the year and add it to your adjusted gross income, plus any tax-exempt interest you earn. If you're married and filing a joint return and the total is above $32,000, your benefits are taxable. Your IRA withdrawals count as part of your AGI.

    About the Author

    A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.