The Painful Truth About Working While On Social Security
Can you work and collect Social Security? The simple answer is yes. The more complicated answer is that you may not want to.
There are two reasons to wait to apply for benefits if you plan to continue to work – penalties and taxes.
Your age and how much you expect to earn will help you decide whether working, while collecting Social Security, makes sense.
What Is Your Full Retirement Age and Why is it Important?
If you have not reached your Full Retirement Age (FRA), you are subject to the earnings test. This means there is a limit to how much you can earn without a penalty.
Your FRA is the age that the Social Security Administration deems you eligible for your full Social Security benefit. It is the center point for determining the amount of your monthly payment.
If you begin collecting benefits before your FRA, your payment amount will be reduced. If you apply after FRA, your payment will be higher.
The Full Retirement Age used to be 65 for everyone, but now it depends on the year you were born.
If you were born between 1943 and 1954 your Full Retirement Age is 66. It increases as follows:
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
If you begin collecting benefits before your FRA, there is an earnings limit of $15,720. You can work, but anything over that amount is subject to a penalty. You will be required to pay $1 for every $2 you earn. That is half of anything you make over the $15,720 limit.
For example, if you bring in $30,720 in a given year, that’s $15,000 over the limit. The penalty will be $1 for every $2 you earn or $7,500. The average monthly Social Security payment is $1,300. It would take nearly six months of payments to satisfy that amount.
This money is not immediately taken out of your paycheck. However, once reported, you will be expected to pay the penalty in full or your entire monthly Social Security payment will be withheld until the fine is fully paid.
You are supposed to report anticipated income to the Social Security Administration so that they can withhold penalty amounts from your Social Security payments as they are acquired. However, should you lose your job or decide to quit, it is difficult to get payments reinstated quickly. So, plan ahead, where possible.
Stopping and starting payments can be confusing for both you and the Social Security Administration. This is where many mistakes occur and, unfortunately, it may be difficult to get them straightened out.
Every year, your income is reported to the Social Security Administration by the IRS. That said, it may be several months before the Social Security Administration notifies you of the overpayment and asks for it to be paid back.
This is something you definitely need to plan for. The amount due may be significant and, if you cannot pay it, several months of your benefit may be withheld. If you continue to earn more than the limit, your payments may be suspended for years.
The Year of Your Full Retirement Age
In the year of your FRA, the earnings limit is higher and the penalty is lower than previous years. From the first of the year until the month you reach your FRA, the limit is $41,880. If you exceed this amount, you will incur a penalty of $1 for every $3 you earn.
Once you reach the month of your FRA, there is no limit to how much you can earn. There is no longer an earnings test or penalty. You can keep all the funds you make from this point forward.
You will be reimbursed for payments missed because of the earnings limit. Once you reach FRA, your benefits will be recalculated to include the months your payments were suspended. In addition, your monthly payment amount will be increased accordingly. But it is paid in small increments and may take 15 years to recoup the missed funds.
What About Taxes?
The U.S. Government considers Social Security benefits income. As a result, Social Security benefits may be taxed.
If your combined income – adjusted gross income, tax exempt interest income and half of your Social Security benefit – is over $25,000 for an individual and $34,000 for a couple, up to 85% of your benefit may be subject to Federal tax. Social Security Administration provides a benefit planner to help you determine if you need to pay tax on your payment.
In addition to federal tax, 13 states tax Social Security benefits – Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. Each state has its own tax rate. This may be a factor when deciding where to live later in life.
At the end of the day, you can definitely work while collecting Social Security benefits. That said, you should consider all of the factors and talk with a tax professional before making a final decision.
Do you plan on working in retirement? Did you realize that Social Security benefits may be taxable? Please join the conversation.
Disclaimer: Everyone’s financial situation is unique, so, please check with your financial professional before making any changes to your tax, retirement or investment strategies. None of the information in this article should be considered financial advice.