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Will my social security be reduced if I do this? I am planning on taking out the money to buy a home.

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GSA, excellent and thorough response.
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Long Post.
The original question's answer depends on the nature of the annuity/pension plan/401 or 403b plan you take money out of.
The important element in this is REMEMBER that the IRS is a super-creditor. That means that taxes that are due can and will be paid to the federal government one way or another. This is why any lump-sum withdrawal from a pension plan or 401K or life insurance plan or annuity has to be carefully reviewed and the proper withholding or extra tax deposits made. You can have money withheld from the lump sum distribution - usually ranging from 10-20% - but your particular tax situation is not the responsibility of the entity paying out your lump sum to anticipate. It is the taxpayer's responsibility to make sure that sufficient taxes are withheld or paid separately as an estimated tax to cover their tax debt.
From the IRS website: "Beginning in February 2002, Social Security benefits paid under Title II - Federal Old-Age, Survivors and Disability Insurance Benefits will be subject to the 15-percent levy through the Federal Payment Levy Program (FPLP); to pay your delinquent tax debt. As of October 5, 2015, IRS will no longer systemically levy the SSA Disability Insurance Benefits through the FPLP. The Old Age and Survivors Benefits will continue to be levied at 15% through the FPLP to pay your delinquent tax debt."
If you usually have social security at a low enough point that you owe little or no tax, a lump sum distribution can cause a very large TAX BILL for federal and state purposes. $75,000 can easily move you up 2 or 3 tax brackets. The taxpayer then faces choices: you either make a payment plan with the IRS and follow it to the letter, or the IRS files a lien on bank accounts and withdraws funds if available whether you need them to pay bills or not, or IRS files a lien with your employer and takes a portion of wages if you are still working, or IRS files a lien on social security or pension distributions if you are retired. Social security is "safe" from being seized for debts (garnishment) like credit cards or mortgages or court judgments BUT social security and other pensions can have money taken out of it to repay a tax debt to the IRS. It's limited to a max of 15% of the person's income for IRS debt, but that can cause a person with low income to be in bad shape. Before this action is taken, the IRS has to send multiple notices to the taxpayer with requests to arrange payment. At least 3 separate legal communications are sent with a final notice 30 days before the garnishment takes place. If taxes are being garnished from social security or pension, no one set up a payment plan or dealt with the IRS before it got ugly. If you owe taxes, interest and penalties, it gets ugly fast.
401K contributions are taken out pre-tax from a salary or wages paid by a company to an employee. They reduce a person's taxable income for federal income tax in the period that they are taken out. Example: You make $100,000; take out $5,000 for 401K, and will have an adjusted earnings of $95,000. This will be adjusted by exemptions, deductions, etc. as applicable by law. You will still owe Social Security taxes and Medicare taxes on the $100,000 because when you take money OUT of the 401K it will NOT have social security taxes or Medicare taken out of it. When you take money out of the 401K account, you owe taxes on it; and if you take money out before you are 59 1/2, you owe an extra 10% penalty at tax time unless you meet very specific exceptions.
If a lump sum is being taken out to purchase a house in 70's, you should consult an elder care lawyer familiar with Medicaid and with tax planning available. Medicaid on the horizon and the lack of money available to maintain the house later is a consideration at this point, in all honesty, and you don't want to put yourself in a bind.
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JoAnn, distributions from IRAs are in fact income, and are taxable, under specific situations detailed by the IRS.

I had some conversations with IRS agents when I began handling my father's taxes, to confirm that our treatment of them was correct. And for my father, the distributions are taxable.

After 70.5 years of age, mandatory distributions must be taken from an IRA, and those distributions are taxed unless specific IRS criteria were met when money was transferred to an IRA while the individual was working.

From the IRS website:

"•Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until distributed." https://www.irs.gov/retirement-plans/traditional-iras

A CD isn't similar to an IRA.
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If you buy the annuity with pretax money, then the entire balance will be taxable. If you use after-tax funds, however, then you'll be taxed only on the earnings. If you cash out a deferred annuity in a lump sum, then you'll have to pay income taxes on all of the earnings higher than your original investment.
How Annuities Are Taxed - Kiplinger
kiplinger.com/article/.../T003-C001-S001-how-annuities-are-taxed
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So, Joanne, how is the money from a pension not taxed as income? I know that mine will be, by the Fed's at least. 1099s report income, yes?
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It's just like like IRAs and CDs. They r not income. It's your money. You pay taxes when u cash them in. With a 401k your tax payment depends on if taxes were paid at time money went into the 401k or before deductions. I would assume taxes were deferred.
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I think a 401 is considered a pension. It's not income as such. You will have to pay taxes on what you pulled out. The only way SS is effected is if you work and make more than $14,500 a year before the age of 66. After 66 you can make as much as u want and collect SS. Your tax man should be able to make it clearer. You should receive a 1099 from the company holding ur 401k.
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Just to make this a little more "real", this year, if one had an income of 28K, one owes $2100 in Federal taxes. If one makes 104K, one owes $19,190. in Federal taxes.
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I got permission from ShortStuff to copy this from my board:
"My son told me a story of a friends mother who was collecting $2300 a month social security. She then took $76,000 from her annuity last year to do some remodeling on her home. She did her taxes this and paid the tax owed on the funds, but the government said she made too much money last year putting her into a higher tax bracket and took 1,000 from her ss each month. Now she makes only $1300 each month and had to do a reverse mortgage just to survive. This woman lives in California which shouldn't really have anything to do with this because it is federal."

So, this person would have been paying very little in Federal taxes on about 28K per year in SS benefits, right? And taking out 76K pushes her into the 28% bracket, with little to no offsets in terms of deductions, I'll bet. So she got a whopping tax bill for that year and the IRS is taking what she owes from her SS, which is her only income, yes?

I just want you to understand that her SS gross hasn't changed; her benefit hasn't been reduced. Her NET has been reduced because she owed taxes.

I think the moral of this tale is that you need to consult a good tax adviser before you do this.

And I just want to ask, is it wise to saddle yourself with a house in your 70s? Just something you might want to think about.
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So, SS, if your friend took out 76K from her annuity in addition to her SS, she would have been very under withheld during the year and should have been filing quarterlies returns with the estimated tax owed, right? Is that why the IRS is clawing back some of her SS? To pay taxes and penalties?
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Shortstuff; I'm not sure why you're posting replies on my message board rather than here. It would be helpful if everyone could see your responses.
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The IRS can stop your SS for unpaid taxes. You need to pay the taxes.
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The withdrawal may put you into a higher tax bracket, but that is NOT the same as your SS payment being reduced.

If you didn't pay income tax on these monies when they were sheltered in the 401K, or when you rolled them into an annuity, they are taxed as regular income now.
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If you and your spouse file a joint return with a combined income below $32,000, your Social Security benefits are not taxable. For income between $32,000 and $44,000, up to 50 percent of benefits may be taxable, and up to 85 percent if combined income is more than $44,000. For more information, go to Social Security's website.
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Do you mean that the funds were paid in on a Pre-Tax basis?

Are you over 59 1/2?

Your social security payments are based upon your earnings while you were working. To my knowledge, what you take out of your 401K has no bearning on your SS.  It may make a difference in whether or not your SS gets taxed or not, I think.

I'm not sure what you mean when you say that you are taking money from your annuity which was a 401K.

Do you mean that you used funds that had been in a 401K to buy an annuity? Have you inquired what the penalty for early withdrawal is from the Insurance Company that sold you the annuity?
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