Relying Heavily on This Popular Retirement Account Could Cost You Future Social Security Benefits -- What to Do Instead

Your retirement savings and your future Social Security benefits can both help cover your living costs in retirement. But what many don't realize is that where you save for retirement can affect how much of your Social Security checks you're allowed to keep.

There's one popular account in particular that could cost you down the road. If you're stashing a lot of money here, it's not too late to change your strategy so you can hold on to more of your Social Security benefits in retirement.

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Why your traditional 401(k) could hurt your Social Security benefits

Traditional 401(k)s are among the most popular retirement accounts for several reasons: high contribution limits, an up-front tax break when you make contributions, and the possibility of an employer match. Together, they can enable you to make quick progress toward your savings goals, especially if you're making regular contributions. But there's a catch.

When you take money out of your traditional 401(k), you'll owe ordinary income tax on it. This raises your provisional income, which the government defines as your adjusted gross income (AGI), plus any nontaxable interest from municipal bonds, and half your annual Social Security benefit.

The government uses your provisional income and your marital status to determine how much of your Social Security benefits are taxable each year. The following table breaks down what percentage of your benefits you could owe income tax on:

Source: Social Security Administration.

So, counterintuitively, the 401(k) funds you withdraw to help supplement your Social Security checks could actually cost you some of those same benefits by raising your tax bill. But there is a way to mitigate this.

Roth savings give you more control over your tax liability

If you're worried about running into this problem, stash some of your savings in a Roth 401(k) if you have one, or a Roth IRA. You will pay tax on these contributions in the year that you make them, but then that money grows tax-free afterward.

When you make withdrawals in retirement, they won't count toward your taxable income, provided you have had a Roth account for at least five years. These withdrawals can help keep your provisional income low, which enables you to hold on to more of your hard-earned Social Security benefits.

If you already have a lot of personal savings in a traditional 401(k), you might be able to do a Roth IRA conversion to change some of your traditional 401(k) funds into Roth savings. But you'll have to pay tax on the converted amount in the year you do it. You can spread this out over several years to slowly build your Roth savings while minimizing the tax liability.

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