If you're considering working even part-time while collecting Social Security in retirement, there are some important rules to follow. Why? Because if you earn too much money from your work, you could end up seeing your Social Security income reduced or paying more in taxes on your Social Security benefits.
You could end up receiving less in benefits
A retired worker can only receive 100% of their Social Security benefit if they claim at their full retirement age. The full retirement age varies, and it depends on a person's birth year, but for people turning 62 this year, the full retirement age is 66 and two months.
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If you claim benefits early (and many, many people do), then you receive less in Social Security income per month than if you had waited until your full retirement age to claim. Your monthly benefit is reduced by a fixed percentage for every month you claim prior to full retirement age and, overall, claiming early can result in monthly Social Security income that's up to 30% less than you'd receive at full retirement age.
If you do claim early and you decide to continue working, then the amount of your monthly Social Security benefit can be reduced even further.
In 2017, Social Security recipients who earn more than $16,920 will have $1 withheld for every $2 earned above that limit. Recipients who turn their full retirement age this year can earn up to $44,880, but their benefit is reduced by $1 for every $3 earned above this higher limit.
If you're subject to a reduction in benefits because of earnings, you should know that Social Security doesn't spread the withholding out over the year. Instead, it doesn't send any monthly benefit payments until the reduction amount is covered.
For instance, let's say your monthly benefit is $600, or $7,200 per year, and you plan to earn $22,000, or $5,080 more than the limit this year. Social Security will withhold half that amount, or $2,540, so it won't send you any monthly checks until that amount is held back.
Because Social Security doesn't issue prorated checks, you wouldn't receive any Social Security income from January through May (five months multiplied by $600 per month = $3,000). The rest of your $600 checks would arrive every month as planned for the remainder of the year, and the extra $460 ($3,000-$2,540) withheld would be paid back to you next year.
It's also important to keep in mind that the money that is being withheld isn't being forfeited. Instead, any money that is held back by Social Security will be added into your benefit calculation, and it therefore increases your Social Security benefit once you reach your full retirement age.
Remember, this income limit only applies if you're younger than your full retirement age. If you've already reached your full retirement age, then you can earn as much as you want without it reducing your benefit.
Also, the limit only applies to earnings from work. It doesn't apply to other income sources, such as investment earnings, pensions, or annuities. If you're self-employed, Social Security bases your income on your net earnings.
You could pay more in taxes
Working while receiving Social Security can also result in a bigger bill at tax time.
Many people won't pay taxes on their Social Security income. However, about one-third of recipients do pay taxes on at least some of their Social Security, and if earnings are high enough, taxes can be applied to up to 85% of your Social Security income.
The IRS determines how much of your Social Security to tax based on your adjusted income. One simple way to quickly see if you might be taxed on your Social Security income is to add one-half of your expected Social Security income to all of your other expected income, including tax-exempt interest.
If that amount totals more than $25,000 for an individual, or $32,000 for a married couple, then at least some of your Social Security will be taxable. If it totals more than $34,000 for an individual or $44,000 for a married couple, then up to 85% of your Social Security may be taxable.
Tying it together
There are plenty of reasons to work in retirement, and not all of them are financial. But if you claim Social Security benefits early or you keep working while receiving benefits after reaching your full retirement age, then you ought to consider the impact earnings from work may have on your Social Security. At a minimum, doing so can help you plan a better budget.
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