As more people choose to work beyond traditional retirement age, it's crucial to understand how earning an income can affect your Social Security benefits. Whether you’re working to stay active, pursue a passion, or supplement your retirement income, it’s important to be aware of the rules that govern how your earnings can impact the benefits you receive. In this article, we’ll explore how working while receiving Social Security affects your benefits, the implications of the earnings test, and strategies to maximize your income while still working.
How Earnings Affect Social Security Benefits
If you choose to work while receiving Social Security benefits and you haven’t yet reached your Full Retirement Age (FRA), your benefits may be temporarily reduced based on your earnings. The Social Security Administration (SSA) has specific rules known as the "earnings test" that determine how much you can earn before your benefits are affected. In 2024, if you are under your FRA, you can earn up to $21,240 without any reduction in your benefits. For every $2 you earn over this limit, $1 will be withheld from your benefits. This reduction is temporary and only applies until you reach your FRA.
In the year you reach your FRA, the earnings limit increases significantly. In 2024, you can earn up to $56,520 before your benefits are reduced. During this year, for every $3 you earn over the limit, $1 will be withheld from your benefits until the month you reach FRA. Once you reach your FRA, there is no earnings limit, and you can earn as much as you like without any reduction in your Social Security benefits. Additionally, the SSA will recalculate your benefits to give you credit for any months in which benefits were withheld due to excess earnings, potentially increasing your monthly benefit.
Long-Term Benefits of Working While Receiving Social Security
While your benefits may be temporarily reduced if you work before reaching FRA, continuing to work can have positive long-term effects on your Social Security benefits, especially if your current earnings are higher than the earnings in your past work record. Social Security benefits are calculated based on your highest 35 years of earnings. If your current earnings replace lower-earning years in your record, the SSA will recalculate your benefit, potentially increasing your monthly payment. By continuing to work and earn income, you might be able to replace some of the lower-earning years used to calculate your benefits. This could result in a higher monthly benefit for the rest of your life, particularly if you had some low-earning years earlier in your career.
Tax Implications of Working While Receiving Social Security
In addition to the earnings test, you should also be aware of how your work income can affect the taxation of your Social Security benefits. Social Security benefits are subject to federal income tax if your combined income exceeds certain thresholds. Your combined income is calculated as your adjusted gross income (AGI) plus nontaxable interest plus half of your Social Security benefits. If your combined income exceeds $25,000 for individuals or $32,000 for married couples filing jointly, up to 85% of your Social Security benefits may be taxable. To reduce the tax impact on your Social Security benefits, consider strategies like reducing your taxable income through retirement account withdrawals, utilizing Roth accounts, or delaying Social Security benefits until you have a lower income. Proper planning can help you minimize the amount of your Social Security benefits that are subject to federal income tax.
Strategies for Balancing Work and Social Security Benefits
Balancing work and Social Security benefits requires careful planning to ensure that you maximize your overall income without inadvertently reducing your benefits. Here are some strategies to help you manage both effectively:
Plan Your Earnings: If you’re under FRA, try to keep your earnings below the annual limit to avoid a reduction in your benefits. If you expect to earn more, be prepared for temporary withholding of benefits. However, remember that these withheld benefits are not lost; they may be credited back to you when you reach FRA.
Delay Social Security: If you’re earning a significant income and don’t need the additional Social Security benefits immediately, consider delaying your benefits. This will allow you to avoid the earnings test and increase your monthly benefit through Delayed Retirement Credits, which can be especially valuable in your later years.
Another approach is to maximize spousal benefits. If you’re married, consider how your earnings and Social Security benefits interact with your spouse’s benefits. Coordinating your claims can help you maximize household income, particularly if one spouse plans to continue working while the other retires. Additionally, consider partial retirement if you’re not ready to fully retire. This can provide additional income while reducing the risk of exceeding the earnings limit. Part-time work can also help you stay active and engaged without fully committing to the demands of a full-time job.
Conclusion
Working while receiving Social Security benefits can be a great way to stay active and supplement your income, but it’s important to understand how your earnings can impact your benefits. By planning your earnings, considering the impact on taxes, and strategically managing your Social Security claims, you can make the most of both your work and your benefits.
If you’re considering working in retirement and want to ensure you’re making the best decisions for your financial future, schedule a consultation with one of our financial advisors. We can help you develop a personalized strategy that aligns with your goals and maximizes your Social Security benefits.
