That Monthly Check
Richard Connor | November 12, 2020
SOCIAL SECURITY is the most important source of income for many retirees. Yet there’s also a lot of confusion, especially when it comes to how benefits are reduced if you continue working and how benefits are taxed. In fact, I’ve heard many folks confuse and conflate these two separate issues. Want a refresher? Here’s a look at both topics:
Working while collecting. If you start Social Security benefits before you reach your full retirement age (FRA), which is age 66 or 67 depending on the year you were born, your benefits are reduced—or withheld, as the Social Security Administration terms it—if you earn “too much.” In 2020, the maximum you can earn without any reduction is $18,240. If you earn more than $18,240, you would lose $1 in benefits for every $2 you earn above $18,240. Suppose you have a $2,000 monthly benefit. If you made $66,240, you’d lose all benefits for the year. For this so-called earnings test, the allowable earnings are adjusted each year for inflation.
There’s a special rule for the first year you start collecting Social Security. Let’s say you retire mid-year and you’ve already earned more than 2020’s $18,240 limit. Under the special first-year rule, you can get a full Social Security check for any whole month you’re retired, regardless of your earnings earlier in the year. As long as your monthly earnings are less than that year’s maximum monthly earnings, you get your full check.
In 2020, the maximum monthly earnings are $1,520, equal to $18,240 divided by 12 months. The government also cuts you some slack in the year you reach your FRA. In that year, you could earn $48,600 in 2020 without any reduction. Above $48,600, you would lose $1 in monthly benefits for every $3 you earn above $48,600, up until the month you reach your FRA.
Once you reach your FRA, you can earn as much as you want without any reduction in your monthly benefit.
What counts as earnings? Social Security includes the wages you make from your job or your net profit if you’re self-employed. Also included are bonuses, commissions and vacation pay. What about pensions, annuities, investment income and other government benefits, such as military retirement benefits? Those don’t count. The benefits that were withheld aren’t necessarily lost forever.
Once you reach your FRA, your monthly benefit is adjusted upward to reflect the benefits surrendered over the prior years. But the withheld benefits aren’t returned right away. Instead, they’re spread over your expected lifetime.
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