Very often we’re asked if there are consequences to working while you are receiving benefits. And of course the answer is “it depends”.
Here are the simple rules. Once you reach Full Retirement Age you can make as much money as you want without incurring a wage based reduction in your Social Security benefits (there’s still the potential that you’ll get taxed on your benefits, but after FRA no wage based reductions). That’s the good news. The bad news is that if you collect ANY sort of Social Security benefit prior to your Full Retirement Age and have earnings from work, Social Security may take back some of your benefit!
In 2020 you can make $18,240 without having to worry about a reduction. However, if you’re receiving benefits prior to full retirement age and you have earnings from work over $18,240 Social Security will reduce your benefit by $1 for every $2 over that limit. Example, if you’re receiving benefits prior to FRA in 2020 and you earn $23,240 in wages or self employment net income, your Social Security checks will be reduced by $2,500 for the year (you were $5,000 over the limit, reduced $1 of benefits for every $2 over the limit = $2,500). Instead of reducing each monthly check proportionally, they will just stop sending checks until they’ve held back the $2,500 wage based reductions.
We have heard the observation “What’s the big deal, when you reach FRA they just give back to you everything that was reduced while you were working prior to FRA?”. That’s only partly correct. You will be credited in future calculations for the months you didn’t receive benefits, resulting in a slightly higher monthly benefit once you reach FRA. But, they certainly won’t pay you the withheld amounts in a lump sum.
Important to know at this point, what types of income do they consider for the reduction calculation if your collecting prior to FRA? Simply said it’s wages and/or self employment net earnings.
If you work for someone else, only your wages count toward Social Security’s earnings limits. If you’re self-employed, they count only your net earnings from self-employment. For the earnings limits, they don’t count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains. They do count an employee’s contribution to a pension or retirement plan, however, if the contribution amount is included in the employee’s gross wages.
If you work for wages, income counts when it’s earned, not when it’s paid. If you have income that you earned in one year, but the payment was made in the following year, it shouldn’t be counted as earnings for the year you receive it. Some examples are accumulated sick or vacation pay and bonuses.
If you’re self-employed, income counts when you receive it — not when you earn it — unless it’s paid in a year after you become entitled to Social Security and earned before you became entitled.
If you plan to work in retirement be very careful about collecting benefits prior to Full Retirement Age as they may take back some of your benefits.