As you know, you can receive Social Security retirement or survivors benefits and continue working.  If you happen to be less than Full Retirement Age (FRA) and you earn more than the earnings test, your benefit will be reduced.  (Note: these reductions are not really lost, you will get credit for the withheld benefits at FRA.)

Earnings Test

If you’re at or older than FRA (age 66 if born between 1946 and 1954, ranging up to 67 if born in 1960 or later) when you begin receiving retirement or survivors benefits, you may earn as much as you like and your benefit will not be reduced.  If, however, you are younger than FRA, your benefit will be reduced $1 for every $2 you earn over $17,040 (in 2018) before the year of FRA. The Social Security benefit will be reduced by $1 for every $3 you earn over $45,360 in the year of FRA, up until the month you reach FRA. These limits are adjusted every year with cost-of-living indices.

The income we’re talking about here is W2 (employee) income or self-employment income, referred to as earned income. Non-earned income, such as interest, dividends, pensions, retirement withdrawals, or rents received are not included for the purpose of the earnings test. Plus, in the first year that you start benefits, only that earned income after you’re receiving benefits is counted, on a monthly basis. Any income received before you start receiving Social Security benefits is not counted toward the earnings test.

For example, let’s say your benefit is $700 per month ($8,400 for the year) and you are age 63.  You work part-time and earn $20,000 during the year, which is $2,960 more than the earnings test.  The Social Security Administration will withhold a total of $1,480 from your benefit ($1 for every $2 over the limit). This is done by withholding your Social Security benefit for three months, January through March of the following year – for a total of $2,100 being withheld. Beginning in April you’ll receive your full $700 benefit, and in January of the next year you’ll receive $620 extra for the additional amount that was withheld above the $1,480. If you advise SSA of your income expectation in the coming year, this will be accomplished during the year of the income, rather than the following year.

If this was the year you’ll reach FRA – for example in June, and your earnings through May were $48,000 ($2,640 more than the limit), $880 would be withheld from your $8,400 benefit which is accomplished by withholding your first two checks of the year, and the additional $520 will be paid to you in January of the following year.

For more trends in fixed income, visit the Advisor Solutions Channel.