The average worker between ages 65 and 69 holds roughly $330,186 in a 401(k), and Baby Boomers as a group carry an average IRA balance of $257,002. Those balances look reassuring on paper. They also happen to be the reason a growing share of retirees now hand a portion of their Social Security benefits back to the IRS every April. The combined income formula that decides how much of a benefit is taxable was written in 1983 and has never been indexed to inflation, so a nest egg that once looked ordinary is now large enough to trigger the rule on its own.
The mechanics of the calculation are straightforward. The IRS adds adjusted gross income, tax-exempt interest, and half of annual Social Security benefits to arrive at “combined income.” Single filers cross into taxable territory at $25,000 and married joint filers at $32,000. Above those lines, up to 50% of benefits become taxable, and above the upper tier, up to 85% is taxable. Those numbers still sit exactly where Congress left them.
How a normal balance crosses the line
Consider a retiree drawing the average Social Security benefit. Aggregate Social Security transfers rose from $1,427.6 billion in the first quarter of 2024 to $1,630.3 billion in the first quarter of 2026, a climb driven partly by the 2.8% cost-of-living adjustment that took effect in 2026. A typical single retiree receiving around $23,000 a year in benefits already counts roughly $11,500 toward combined income before touching a dime of savings. That leaves little distance to the single-filer threshold, and a typical 401(k) balance is fully capable of covering that gap without any withdrawal at all.
Interest income does most of the work. The 10-year Treasury yield sat at 4.48% on July 1, 2026. A $330,186 balance parked in intermediate Treasuries generates enough annual interest to push a single filer past the first tax threshold. Required minimum distributions, on top of that, push most retirees comfortably into the upper bracket, where the majority of their benefits become taxable ordinary income. Required minimum distributions on top of that push most retirees comfortably into the upper bracket, where the majority of their benefit becomes taxable ordinary income.
Why the thresholds keep catching more people
The thresholds have not moved, but almost everything else has. CPI-W rose from 316.349 in July 2025 to 328.829 in May 2026, and Core PCE climbed from 126.43 to 130.082 over roughly the same window. Benefits have been adjusted upward to keep pace with prices, which mechanically raises the combined-income count each year, while the single and joint filer lines stay frozen. What was designed in 1983 to affect only the wealthiest tenth of beneficiaries now reaches deep into the middle of the retiree distribution.
Cost of living compounds the pressure. The Bureau of Labor Statistics reports annual expenditures per household of $78,535 in 2024, up from $72,973 in 2022. Retirees spending at anywhere near that level need meaningful portfolio withdrawals on top of Social Security, and those withdrawals feed straight into AGI. The personal savings rate has fallen from 6.2% in early 2024 to 3.9% by the first quarter of 2026, an indication that households are drawing down rather than adding to reserves.
What retirees can actually do
Two main levers determine the outcome. The first is the composition of taxable income. Roth conversions completed before required minimum distributions begin can shrink future AGI, because qualified Roth withdrawals sit outside the combined-income calculation entirely. Municipal bond interest counts toward combined income even though it is federally tax-exempt, so retirees using munis to lower their tax bill may still trigger Social Security taxation without realizing it.
The second is the sequence of withdrawals. Pulling from taxable brokerage accounts first can hold AGI down in early retirement, while delaying Social Security to age 70 raises the benefit itself and can be paired with strategic Roth conversions in the intervening years. Both moves can reduce how much of the benefit is taxed and at what rate, even though the thresholds now catch nearly every retiree with a meaningful balance. The frozen 1983 numbers are the reality of the system, and planning around them is what an average retiree balance actually requires.
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