Americans work a lifetime to earn their Social Security benefits, and most retirees count on them as a major source of retirement income. Yet there are several situations in which the federal government can effectively reduce or even eliminate your Social Security benefits. Below, we'll go through each of them to let you know what they are and what you can do to avoid them or mitigate their impact on your finances in retirement.
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1. You take early benefits and still work.
Many workers claim early Social Security before they retire. However, if you haven't yet reached your full retirement age, then there's a limit to how much income you can earn before the Social Security Administration starts taking away benefits.
If you'll be younger than your full retirement age all year, then if you earn more than $16,920 in 2017, then you'll lose $1 of your annual benefits for every $2 you earn over the threshold. If you'll reach your full retirement age during 2017, then the earned income limit rises to $44,880, and you'll lose $1 for every $3 in excess of the limit. Moreover, only earnings from before your hitting full retirement age count toward the limit.
Forfeited benefits do have one positive impact, though: For every month of benefits you lose, you're treated as having retired a month later, which makes an incremental bump to your monthly payments later on. However, some find that the easier thing to do is to wait until they've stopped working to claim benefits.
2. You have a pension from a public sector job as well as your own Social Security retirement benefits.
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Some public sector jobs don't participate in the Social Security program, offering workers their own public pensions instead. If you split your career between such a job and one where you were subject to Social Security taxes, then the Windfall Elimination Provision can take away some or all of your benefits.
The purpose of the Windfall Elimination Provision is to prevent what the government sees as an unfair bump in your Social Security benefits stemming from the way the SSA calculates your monthly payment. However, the practical effect is that you can lose Social Security benefits equal to up to half your public pension, and in some cases, that can entirely wipe out what you would otherwise get from Social Security.
Your best remedy is to coordinate your two retirement benefits as best you can. Taking one early and deferring the other as long as possible can sometimes provide the best result, but you'll need to look closely at the specific provisions of your pension to determine the optimal strategy.
3. You have a pension from a public sector job but can also get spousal or survivor benefits based on your spouse's work history.
Similarly, the government doesn't want public sector employees to double dip with both their own public pension benefits and survivor or spousal Social Security benefits based on a spouse's earnings. The Government Pension Offset cuts your Social Security benefit by an amount equal to two-thirds of what you get from your public pension. Again, that can lead to complete loss of Social Security benefits depending on the amounts.
As with the Windfall Elimination Provision, your best strategy here is to coordinate the timing of claiming your pension and Social Security benefits. Offsetting the time at which you claim those benefits can minimize the negative impact of the Government Pension Offset.
4. Your total income makes your Social Security subject to income tax.
The IRS doesn't directly take away Social Security benefits. But by imposing income tax in some cases, the taxing agency has the same impact on what retirees get to keep from their monthly Social Security checks.
The formula for taxing Social Security is somewhat complex, but the general idea is that if the total of one-half of your Social Security and the full amount of non-Social Security income exceeds $25,000 for singles or $32,000 for joint filers, then at least a portion of your benefits will be subject to tax. By timing your Social Security benefits toward years in which your other income will be lower, you can reduce or eliminate Social Security taxation, but most people only have a limited amount of control over those income sources.
5. Your benefits are subject to the family maximum.
One little-known provision of Social Security imposes a maximum amount of benefits that a family can take based on any one person's work history. The formula for determining the family maximum is complicated, but it generally amounts to 150% to 180% of the worker's primary insurance amount. That amount means that the family maximum rarely comes into play when the only people claiming are a worker and a spouse. But when children are eligible, it can come into play, and that can result in a spouse and the couple's children getting less from Social Security than they'd otherwise be entitled to receive.
One strategy to consider if the family maximum applies is whether one or more family members can claim benefits based on their own work histories instead. The maximum applies to people claiming on the same work history, so if both spouses claim benefits on their own respective work records, then the family maximum plays no role whatsoever.
Preserving your Social Security benefits is important, and knowing where the government can reduce or eliminate your Social Security is a key first step. That way, you'll be better able to plan a strategy that can prevent the government from taking away your hard-earned benefits.
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