Social security benefits and retirement income

Definitions

Social Security benefits

Payments received from the government, which may be partially taxable depending on income and filing status.

These benefits may be fully or partially excluded from taxable income depending on a taxpayer’s overall financial situation. Social Security benefits are nontaxable to a recipient who has no other income source. Social Security benefits can be partly taxable income, depending upon a taxpayer’s combined income and filing status. For individual filers, combined income below $25,000 means benefits are generally not taxed. Taxpayers who file married filing jointly face no taxation on benefits if their combined income is below $32,000. For taxpayers who file married filing separately and did not live with your spouse during the entire tax year, the threshold is $0; all of your benefits are taxable. If a taxpayer has lived with your spouse at any time of the tax year, then up to 85% of benefits are taxable. Combined income consists of adjusted gross income, nontaxable interest, and half of Social Security benefits. Understanding how to calculate this number can significantly impact tax liability.

Here are key points regarding taxation thresholds:

• Individual combined income below $25,000: No tax on benefits
• Individual combined income $25,000-$34,000: Up to 50% of benefits taxable
• Individual combined income above $34,000: Up to 85% of benefits taxable

An additional $6,000 will be added to the standard deduction for Social Security benefit recipients age 65 or over for tax years 2025 through 2028.
See Schedule 1-A, Additional Deductions for more information.

Retirement benefit distributions are generally taxable. Principally, if any part of the benefit included the recipient’s contribution to the plan, then the contributed portion of the benefit is nontaxable. Traditional IRA¹ distributions are fully taxable if the taxpayer has no basis in the IRA. If there is a basis, then the portion of each distribution is a return of basis.

Roth IRA distributions are tax free subject to holding period. Distributions from a Roth IRA are tax-free if they meet specific conditions. A “qualified distribution” occurs at least five years after the first contribution. Non-qualified distributions may be subject to taxes and penalties. Only the earnings portion of a non-qualified distribution is taxable, not the contributions.

Like the traditional IRAs, SEP IRA² and SIMPLE IRA³ distributions are fully taxable, but if the taxpayer has a nondeductible basis in a traditional IRA, then the distribution will be partially taxable and partially tax-free.

Distributions from qualified plans such as the 401(k)⁴ and 403(b)⁵ plans are fully taxable unless the participant has contributed after-tax money to the plan. Eligible participants must be at least 21 years of age and have at least 1,000 hours of service.

Retirement plan footnote explanations:

¹ Traditional and Roth IRAs participants are for any employee or self-employed taxpayer with compensation.

² SEP IRA participants must be self-employed or works for an employer that contributes to a SEP for all eligible employees.

³ SIMPLE IRA participants must be self-employed or work for a small employer who employs 100 or fewer employees who received at least $5,000 compensation.

⁴ Can be set up by self-employed individuals, corporations and partnerships. Employees choose the amount he or she can contribute. Employers are not obligated to match employee contributions.

Required Minimum Distributions (RMDs)

Definitions

Required Minimum Distributions (RMDs)

The minimum amounts that must be withdrawn annually from certain retirement accounts after reaching a specified age.

These withdrawals begin once a taxpayer reaches the mandatory age and apply to traditional IRAs, 401(k)s, 403(b)s, and other qualified retirement plans. These withdrawals are generally taxable as income (unless made from after-tax contributions).

Under the SECURE Act 2.0, your required beginning age for RMDs is 73 if you were born between 1951 and 1959, and 75 if you were born in 1960 or later (starting in 2033). While your first RMD can be delayed until April 1 of the year after you reach that age, doing so results in two taxable distributions in a single year, as all subsequent annual deadlines fall on December 31. If you are still working and do not own more than 5% of the company, you may be able to defer RMDs from your current employer’s plan until you officially retire.

To calculate a first Required Minimum Distribution (RMD) from an Individual Retirement Arrangement (IRA), the Uniform Lifetime Table (IRS Publication 590-B) should be used. This is the standard table for most IRA owners determining their lifetime RMDs.

The only exception applies if the sole beneficiary for the entire year is a spouse who is more than 10 years younger than the IRA owner; in that specific case, the Joint Life and Last Survivor Expectancy Table would be used instead.

The penalty for failing to take an RMD is a 25% excise tax on the amount you should have withdrawn but didn’t, though this can often be reduced to 10% if corrected quickly (within two years) or waived if due to reasonable error. You must file IRS Form 5329 to report the missed distribution and request the penalty reduction or waiver.

Penalty breakdown:

• Standard penalty: 25% excise tax on the shortfall.
• Reduced penalty (quick correction): 10% if you take the missed RMD within the correction window (generally two years).
• Waiver: The penalty can be entirely waived if you can show the failure was due to a reasonable error and you’ve taken steps to fix it, by filing Form 5329 with an explanation.

How to get the penalty reduced/waived:

• Withdraw the full amount of the missed RMD.
• File Form 5329, detailing the missed RMD and the amount corrected.
• Explain why it was a reasonable error and attach a statement explaining the situation and steps taken to correct it.

Trump accounts

Definitions

Trump account

A tax-deferred individual retirement account (IRA) for minors created under federal law in 2025.

These are new accounts designed to encourage early, long-term savings for children, with a portion of withdrawals for qualified purposes like education or a first home being subject to ordinary income tax. Trump accounts are structured as custodial-style traditional IRAs, owned by the child but administered by an adult (parent, guardian, etc.) until the child turns 18.

• Any U.S. citizen child under age 18 with a valid Social Security number is eligible to have a Trump account opened on their behalf.
• Children born between January 1, 2025, and December 31, 2028, are eligible to receive a one-time $1,000 seed contribution from the federal government.
• Annual contributions of up to $5,000 (indexed to inflation) can be made by individuals, employers (up to $2,500 tax-free per employee per year via a cafeteria plan), or charities.
• Funds must be invested in low-cost U.S. stock index mutual funds or exchange-traded funds (ETFs) with annual fees capped at 0.1%.
• Funds generally cannot be withdrawn before the calendar year the child turns 18. After that age, the account follows traditional IRA rules, meaning distributions are taxed as ordinary income and may be subject to a 10% penalty before age 59½, unless an exception (e.g., education, first home purchase) applies.

See Form 4547 to learn more about the Trump account.