The rules surrounding your Social Security benefits can be confusing. And the topic of collecting benefits while you’re still working can add to this confusion.
There are any number of reasons to work into retirement while drawing Social Security benefits. These could include the need for the extra income or perhaps a desire to keep active and engaged with others. Here are some important details to know if you’re working and collecting your Social Security benefits, or considering taking them.
1. When You Can Claim Social Security Benefits
You’re eligible to claim your Social Security benefits as early as age 62. The full retirement age (FRA) for people born before 1960 is 66; it rises to 67 for people born after 1960. Your Social Security benefit level maxes out at age 70.
Taking your benefit at age 62 results in a 25 percent lower payout than if you waited until your FRA, if it’s 66. It’s 30 percent lower if your FRA is 67. Claiming your benefit at age 70 results in an 8 percent annual increase in the benefit for every year you wait between your FRA, if it’s age 66.
There’s no one right answer here as to when to claim your Social Security benefits. Factors like your income needs and life expectancy come into play. In addition, there are timing factors to consider for married couples about when each should claim.
2. Your Benefits Can Still Increase
People who are working past age 60 and beyond, or after they file for benefits, often ask whether their earnings increase their Social Security benefit, said Mike Piper, CPA and author of “Social Security Made Simple.” “The answer is yes,” he said. “Your primary insurance amount gets recalculated every year, based on any new earnings that you’ve had. So if your new earnings are included in your 35 highest wage-inflation-adjusted years, your benefit would go up.”
3. Lower Earnings Won’t Decrease Your Benefits
For people who are still working but earning less money, which is common for semi-retirement, many wonder if that will lower their Social Security benefit, Piper said. “The answer is no, additional years of earnings won’t cause your benefit to decrease, no matter how low those earnings are,” he said. “If a new year of earnings isn’t in your 35 highest, it simply won’t be included in the calculation.”
4. Earned Income and Benefit Reductions
If you’re working and collecting Social Security benefits, it’s important to understand how your earned income can affect your Social Security payments. “Your earnings can cause a reduction in your Social Security benefits now, but you’ll get credit for the reduction later,” said Jim Blankenship, financial advisor and the author of “A Social Security Owner’s Manual.”
“For every $2 over $15,720 that you earn from a job or self-employment [according to 2016 figures], your Social Security benefit will be reduced by $1,” he said. “Withheld benefits are credited back to you once you reach FRA.”
This reduction applies to income earned from employment and self-employment. It does not apply to income from investments or other non-employment sources of income. Once your reach your FRA, there are no reductions in your benefit due to earned income. At that point, you can earn as much as you’d like with no impact on your benefits.
5. Taxes on Earned Income
For people who continue to work after their retirement age, payroll taxes such as income taxes, Medicare and Social Security will all continue to be withheld from your pay. This remains the same regardless of your age and whether or not you are drawing a benefit from Social Security.
6. Your Benefits Could Be Taxed
Based upon your income, your Social Security benefits could be subject to federal taxes. Social Security uses an income measurement called “combined income” to determine how much of your benefit could be could be subject to taxes. Combined income is calculated as adjusted gross income plus non-taxable interest income — from municipal bonds, for example — plus half of your Social Security benefit.
For 2016, here’s how taxes on Social Security income is determined:
For people filing an individual tax return:
- If your combined income is between $25,000 and $34,000, up to 50 percent of your benefit might be subject to taxes.
- If your combined income is over $34,000, up to 85 percent of your benefit might be subject to taxes.
For people filing a joint tax return:
- If your combined income is between $32,000 and $44,000, up to 50 percent of your benefit might be subject to taxes.
- If your combined income is over $44,000, up to 85 percent of your benefit might be subject to taxes.
No more than 85 percent of your benefit will be subject to taxes. Note that 13 states may tax your Social Security benefit, in addition to any federal tax liability. For those who are working or who are self-employed, this could certainly be a consideration.
7. Benefit Do-Over
If you change your mind after you’ve claimed your Social Security benefits, you’re entitled to a once-per-lifetime “do-over” to withdraw your application. You might want to do this if your circumstances change after you initially file for benefits — for example, if you decided to return to work after retiring.
The rules surrounding withdrawing your application are:
- The window to do this is within 12 months after you filed for retirement benefits. Once the 12-month period has passed, you lose this option.
- All benefits received by you and any family members must be repaid.
- If you are entitled to Medicare benefits, you may also withdraw your application for Medicare benefits — but are not required to.
If you go this route, you can reapply for benefits at a later date at the benefit level in effect at that time for your age and earnings record.
8. Contributing to Retirement Plans
Taking Social Security benefits does not impact your ability to contribute to retirement plans, such as an IRA or a 401k. Traditional IRA accounts do prohibit contributions after you reach age 70½. If you are working at a company that offers a 401k, you can continue to contribute after age 70½.
If you have sufficient earned income, you can also make contributions to a Roth IRA, as long as you meet the earned income requirements. Note that you will be subject to any requirements to take your required minimum distributions once you reach age 70½.
9. Working and Medicare
Don’t forget Medicare in this equation. “People need to be aware that even if someone decides to wait, and accrue delayed credits with respect to Social Security benefits, the rules for Medicare eligibility remain unchanged,” said Jae Oh, financial planner and author of “Maximize Your Medicare.” “Depending on the size of your employer, the Medicare configuration needs to be considered very carefully in order to avoid Medicare Late Enrollment Penalties, which may never expire.
“Further, even if covered by an employer, one should not necessarily conclude that the group health insurance benefits are superior, either in cost or coverage, when compared to a properly-considered Medicare configuration,” he added.
Read More: Why You Don’t Need $1 Million to Retire