One of the key factors among others in determining when to file for Social Security benefits is the earnings test. The earnings test is part of the “Rules You Should Know” series.
The earnings test only applies to filers who have not reached full retirement age (FRA). For more on full retirement age, please read my article: The Basics: Full Retirement Age and Social Security.
What is the Earnings Test?
According to SSA.gov, Social Security withholds benefits if your earnings exceed a certain level, called a retirement earnings test amount. Again, this only applies to filers who have not yet reached their full retirement age.
Okay, so if you have reached full retirement age and you file for benefits, do you have to worry about the earnings test?
Correct! You must have a great teacher!
To put it simply, if you are still working and file to receive benefits in years before you reach your FRA, most likely your Social Security benefits will be reduced. Social Security will deduct one dollar from every two dollars you earn above the annual limit. The limit for 2016 is $15,720, and for 2017 it is $16,920.
Your Earnings and Your Benefits: How Much Will You Get?
I thought I would share the following table from SSA.gov. It displays how much you’ll receive in benefits based on your monthly Social Security benefit and how much you’ll earn in 2016.
For example, Tim starts receiving Social Security benefits when he turned age 62 in January of 2016, his reduced monthly benefit is $1,000 per month, or $12,000 per year. His annual expected earned income for the year of 2016 is $25,000. Social Security will withhold $4,640 of benefit payments from his $12,000 annual payment.
Naturally, there is a more confusing and complex rule. If you file for benefits early, but in the same year you will attain your full retirement age, the limit is substantially higher and Social Security will deduct one dollar from every three dollars you earn above the annual limit. The higher limit for 2016 is $41,880. For 2017, it’s $44,880. The higher exempt amounts apply only to earnings made in the months prior to the month you reach full retirement age. It does not apply to earnings in the month or after you reach full retirement age.
Will I Get These Benefits Back?
Yes! If some of your benefits are withheld because of the earnings test rule, your monthly benefit will increase starting at your full retirement age. For more information, see How Work Affects Your Benefits at SSA.gov.
What is Considered “Earnings”?
The Social Security Administration bases the earnings test on earned income. According to SSA.gov, earned income is considered:
- Self-employment income
Here’s what is not included:
- Capital gains
- Interest income
- 401(k), 403(b) distributions
- IRA distributions
- Pension benefits
- Government benefits
- Annuity income
- Social Security benefits received
Whose Benefits are Affected?
Any benefits based on your earnings record, retirement benefits, spousal benefits, and child benefits are affected. Again, if you have reached full retirement age, this does apply to any of your benefits.
Additionally, if you want a comprehensive review, please take a look at our Social Security Solution Program. I put this program together from the feedback I have received from clients and readers of Social Security Teacher. This solution is designed specifically for those of you who want help and guidance in making the best decision for you and your family. I am a CERTIFIED FINANCIAL PLANNER™ professional, and have the experience to help you get there.
- SSA.gov publication 10069: How Work Affects Your Benefits