When clients near age 62, they often get excited about Social Security benefits and rightfully so. Given we spend the majority of our adult lives working and paying into the Social Security system, its wonderful to finally have the first opportunity to access that retirement income. Yet electing to take that income before Full Retirement Age (FRA) requires an analysis of all the caveats Social Security has to offer, not the least of which is the Income Limit.
Income Limit
What’s the Income Limit? It’s basically a cap on the amount of money you can earn before the Social Security Administration withholds a portion of your benefit. For 2020, the maximum amount an individual can earn annually is $18,240 before the Social Security Administration will withhold $1 in benefits for every $2 over that amount that you earn. The one exception is during the calendar year you attain full retirement age. During that period, the earnings limit that will apply to you nearly triples to $48,600. The withholding amount on dollars earned over that limit is not as steep, either. For every $3 over the limit, the Social Security Administration withholds $1 in benefits. These amounts change every year, and must be factored in up until you reach FRA.
Monthly or Annual
Income limits can be either annual or monthly. Generally, in the first calendar year you receive Social Security benefits and have a month of earnings that is less than the monthly earnings limit amount (annual limit divided by 12), the income limit turns into a monthly income limit test. It will run for the remainder of that calendar year. After that, it’s back to the annual test. This is done to benefit individuals who retire mid-year, but may have already exceeded the annual limit. Otherwise, many would have to wait until the following year to receive benefits.
What Counts as Income?
- Gross wages from employment income
- Net earnings from self-employment
Therefore, excluded income includes the following:
- Pension payments
- Most annuity payments
- Money from IRAs and other retirement account distributions
- Dividends
- Interest income
- Capital gains
This is not an exhaustive list of “income” for Social Security purposes, but should encompass most types.
FRA
Its important to remember this calculation only affects someone that takes Social Security benefits before full retirement age (FRA). If you wait until FRA, you have nothing to worry about regarding income limits. A table of FRA’s for each year of birth is included below:
- 1943 – 1954: Your full retirement age is 66
- 1955: Your full retirement age is 66 + 2 months
- 1956: Your full retirement age is 66 + 4 months
- 1957: Your full retirement age is 66 + 6 months
- 1958: Your full retirement age is 66 + 8 months
- 1959: Your full retirement age is 66 + 10 months
- 1960 or later: Your full retirement age is 67
What if I Earn Too Much?
If you suspect you will exceed your monthly or annual limit, its best to notify the Social Security Administration ahead of time. This can ensure you know when benefits will be reduced and will allow you to make adjustments to your monthly budget. The other alternative is to wait until the SSA sends you a letter, but at that point you may have an income gap while the SSA withholds the overpayment before your benefits resume.
Please contact us if you have additional questions or comments about Income Limits and how they may affect your overall financial plan.
This blog is meant to be for general information. Please don’t solely rely on the information contained herein when making decisions about Social Security and retirement planning in general. You should consult with your own tax, legal and financial advisors as well as discuss your situation with the Social Security Administration before making any decisions.