If you work while receiving Social Security, your social security may be reduced if you are below your full retirement age (FRA). Commonly referred to as the “earnings test,” this rule applies to individuals who are receiving Social Security retirement benefits before reaching their full retirement age. The FRA varies based on the individual’s year of birth.
The earnings test aims to prevent individuals from earning too much money from work while receiving Social Security retirement benefits before reaching full retirement age. It applies to both wages and self-employment income but excludes investment income.
As of 2023, if an individual remains under full retirement age throughout the year, $1 in benefits will be withheld for every $2 earned above $21,240. In the year of reaching full retirement age, the limit increases to $56,520, and $1 in benefits is withheld for every $3 earned above that limit until the month the individual reaches their full retirement age.
Examples using 2023 amounts:
- Under Full Retirement Age All Year:
- Entitled to $800 per month in benefits ($9,600 for the year).
- Works and earns $31,240 ($10,000 more than the $21,240 limit) during the year.
- Social Security benefits reduced by $5,000 ($1 for every $2 earned above the limit).
- Receives $4,600 of the $9,600 in benefits for the year.
- Reaching Full Retirement Age in August 2023:
- Entitled to $800 per month in benefits ($9,600 for the year).
- Works and earns $63,000 during the year, with $57,000 of it in the 7 months from January through July ($480 over the $56,520 limit).
- Social Security benefits reduced through July by $160 ($1 for every $3 earned above the limit).
- Receives $5,440 out of the $5,600 benefits for the first 7 months.
- Starting in August 2023, at full retirement age, receives the full benefit ($800 per month), regardless of earnings.
When determining benefit deductions, the Social Security Administration considers only wages from employment or net profit for the self-employed. This includes bonuses, commissions, and vacation pay but excludes pensions, annuities, investment income or interest, veterans benefits, and other government or military retirement benefits.
Importantly, benefits withheld due to the earnings test are not permanently lost. They are added back to an individual’s benefit when they reach full retirement age, resulting in an increased monthly benefit amount.
It’s crucial to recognize that the earnings test ceases to apply once an individual reaches their full retirement age. At that point, they can earn as much as they want and still receive their full Social Security retirement benefits.
Fee-Only financial advisers, accountants, and attorneys specializing in social security can provide valuable guidance in maximizing Social Security benefits based on individual circumstances. Whether considering factors like marital status or specific financial situations, their expertise can significantly impact the dollar amount of benefits received, ensuring the optimal outcome for individuals.
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