How are Social Security benefits impacted by wages and other earnings? Watch this video and find out what type of earnings at certain ages will result in a reduced Social Security benefit.
Transcript of video follows:
Thank you for joining us for another edition of Social Security Intelligence.
There’s lots of confusion about what happens when you work and draw Social Security. I want to help you clear it all up.
Broadly speaking, if you work and claim Social Security benefits at the same time, part or all of your payments could be withheld. Using 2015’s earnings limit numbers, let’s take a look at how working in retirement could affect your Social Security payments:
The Social Security Administration splits up the earnings limit into two categories.
1) Earnings when you are age 62 through January 1 of the year you attain full retirement age
2) Earnings after January 1 of the year you reach full retirement age
The first category of earnings limit is the lowest and has the sharpest penalty. In those years the limit is $15,720. If your earnings exceed that amount, the Social Security Administration will withhold $1 for every $2 over the limit.
The second category is more generous, but much shorter in length. It begins on January 1 of the year you attain full retirement age. During that period you can earn $41,580 before the earnings limitation is applied. If you go over that amount, the Social Security Administration will withhold $1 for every $3 over the limit.
The good news is that at your full retirement age, there is NO EARNINGS LIMITATION! So no withholding is applied.
It’s easy to simply say all of that, but let’s take a look at the earning limitation at work. Since the first category is the longest, and possibly the most likely to impact you, let use those numbers in our example.
First, let’s assume that your Social Security benefit is $20,000 for the entire year. Let’s also imagine that between January and August you made exactly $15,720. From September to the end of December you made an additional $10,000.
So for the year, your total income was $25,720. That’s a problem! You’ve exceeded the income limit by $10,000! And remember, they’ll withhold $1 for every $2 over the limit. Maybe an easier way to say that is that they’ll withhold 1/2 or 50% of everything over the limit.
So how would that apply in this situation? We know that we are $10,000 over the limit. The Social Security Administration will reduce benefits by 50% of all dollars over the limit so that’s a reduction of $5,000.
Now that $20,000 benefit has become a $15,000 benefit.
Now that we have a good grasp on that, there are still some big questions;
1) What type of income counts as “earnings”
2) What if you retire in the middle of a year and have already exceeded the income limit?
3) What if your benefits are already being withheld?
Let’s tackle the earnings question first.
What counts as earnings in the income limit is (a) wages and (b) earnings from self-employment. Sources of income that don’t count towards the income limit include pensions, interest, annuities, IRA distributions and capital gains.
So what about if you retire in the middle of a year and have already exceeded the income limit? In this case, there is a one-year exception to the annual earnings limit. It’s simply replaced with a monthly earnings limit.
That amount you can earn-and escape withholding- in the years prior to your full retirement age is $1,310 per month. In the year you attain full retirement age, you can earn up to $3,490 per month without having benefits withheld. As always, once you attain FRA—there is NO earning limit.
Just remember…this is a one time exception!
What happens if your benefits are already being withheld because your income is too high? Don’t despair…you are aren’t missing payments that you’ll never get back. The Social Security Administration will simply recalculate your benefits at your full retirement age to reflect the months that benefits were withheld.
The best way to avoid the earnings limitation is to wait until full retirement age to file for benefits. If you can’t wait, make sure you have a clear understanding of how working affects your Social Security benefits.
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Thanks again for watching.