Once you reach full retirement age (#FRA), any income you earn will not affect your social security benefits. If, however, you took benefits early, you may be affected by the earnings limitation, which caps how much income you may earn and still receive social security benefits. Moreover, if other family members, such as your spouse or children, are receiving dependent benefits based on your work history, your #earnings could reduce their benefits, too.
What’s the earnings limit?
In 2020, the Social Security Administration (#SSA) will allow individuals to earn up to $18,240 in calendar years prior to their FRA without being affected by the earnings limit. Once you reach this limit, $1 of social security benefits will be withheld for every $2 earned above the threshold. The threshold is higher in the year you reach your FRA: $1 will be withheld for every $3 earned above $48,600. This offset would end in the month in which you reach your FRA.
Example: Let’s assume that Sally decides to begin collecting social security at age 64, two years before her FRA. She contacts the SSA and finds out that her monthly benefit amount will be $1,800. She has been doing part-time consulting work to keep busy and estimates that she has earned $35,000. This amount puts her $16,760 over the earnings limit for 2020 and consequently reduces her social security benefit by $8,380 for the year.
What income applies to the earnings limit?
When applying the earnings limit, the SSA looks only at earned income, which is an individual’s gross wages or net earnings if self-employed. A worker’s investment income, government benefits, retirement plan distributions, and pensions do not count as income for the earnings limit. In addition, if you receive income after retirement that social security considers to be a “special payment,” it is not counted as income for the earnings limit. Post-retirement bonuses, vacation pay, commissions, sick pay, severance pay, and deferred compensation fall into the special payment category and therefore do not count toward the earnings limit.
Offset benefits are not lost forever
If you find yourself in a situation where social security benefits are offset by the earnings limit, you will recoup these payments once you reach your FRA. At that time, your benefits will be increased to account for the amounts withheld because of the earnings limit. Benefits paid to spouses and survivors with minors or children with disabilities in their care will not receive this increase at FRA.
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This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer. © Copyright 2020 Commonwealth Financial Network®. Presented by Sara Romaine. Sara Romaine is a financial advisor at Blue Hills Wealth Management. BHWM is located at 300 Crown Colony Drive, Quincy MA. Sara can be reached at 617-471-6800 or sara@bluehillswm.com. Securities and advisory services offered through Commonwealth Financial Network, Member, FINRA/SIPC a registered investment advisor. Fixed insurance products and services and College Planning services offered by Blue Hills Wealth Management and College Funding Solutions are separate and unrelated to Commonwealth.
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