There’s lots of confusion about how much you can earn while on Social Security. Here’s good news…the Social Security earnings limit rules really aren’t that difficult to quickly understand.
Broadly speaking, the effect of claiming Social Security and working could be that part (or all) of your payments could be withheld. Using 2016’s earnings limit numbers, let’s take a look at how working in retirement could impact your Social Security payments:
The Social Security earnings limit is split 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 $41,880 before the Social Security earnings limitation is applied. If you go over that amount, they 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.
The Real-World Rules on Social Security Income Limits
So those are the rules, but how does the earnings limitation work in the real world?
Since the first category is the longest, and possibly the most likely to impact you, let’s 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 the end of August you made exactly $15,720 in wages from a job. From September to the end of December you made an additional $10,000 in wages.
So for the year, your wages from employment was $25,720. That’s a problem! You’ve exceeded the income limit by $10,000!
$25,720 – Total Wages
-$15,720 – Social Security Income Limit
$10,000 – Excess Over Income Limit
So how would the earnings limitation apply in this situation? Since you are $10,000 over the limit, the Social Security Administration will reduce your benefit amount by $1 for every $2 over the limit.
Maybe an easier way to express that is that the Social Security Administration will reduce your benefit by 50% of every dollar over the limit.
The benefit reduction calculation would appear as follows:
$10,000 – Excess Over Income Limit
X 50% – Or, $1 for every $2 over limit
$5,000 – Benefit Reduction
Now that $20,000 benefit has become a $15,000 benefit.
Other Big Questions
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) NET 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!
And last, what happens if your benefits are already being withheld because your income is too high? Don’t despair…you 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 impacts your Social Security benefits.