Frozen IRS thresholds push more retirees into taxable territory as average 401(k) balances reach $330,186, triggering taxation on benefits.
The average retiree’s 401(k) balance of $330,186 now exceeds levels that trigger Social Security taxation, due to IRS thresholds frozen since 1983. Interest alone on a $251,400 balance can push filers past the $25,000 single-filer limit, making up to 85% of benefits taxable as ordinary income.
The combined income formula—adjusted gross income plus half of Social Security benefits—has not been adjusted for inflation. Single filers face taxation at $25,000, while joint filers hit the threshold at $32,000. Baby Boomers hold an average IRA balance of $257,002, further increasing exposure to the rule.
Roth conversions before required minimum distributions and delaying Social Security until age 70 are cited as strategies to mitigate tax liability. The IRS has not updated the thresholds despite rising retirement account balances.