Social Security tips for working retirees
If you’re planning to work for income after you retire, you need to be aware, if you’ve begun taking Social Security benefits, of how your Social Security income may be taxed and the earned income thresholds that determine the level of your taxes and any reductions in benefits.
37% of people in a recent AARP survey said that they plan to work either full time or part time during retirement. They do this in addition to the financial benefits, many older workers anticipate that working after retirement can add valuable structure to their day and provide the mental stimulation that comes from interacting with co-workers, clients, and other work associates.
It’s a good idea to know how working in retirement will affect your Social Security benefits and your tax bill. These are the facts plus some strategies to consider.
Temporary benefit reductions for earned income
The youngest age at which you’re eligible to claim Social Security benefits is 62. If you claim your benefits and continue to work, there’s an earning test until you reach your full retirement age, 66-67. If you have earned income in excess of $17,040 in 2018, your benefits will be reduced by $1 for every $2 of income over the $17,040 limit.
“Earned” income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned because they are all based upon employment. Earned income doesn’t include investment income, pension payments, government retirement income, military pension payments, or similar types of “unearned” income.
If you reach your FRA during 2018, the limit for earned income rises to $45,360 and the benefits reduction is $1 for every $3 earned over the limit until the month you reach your FRA. After, there are no earnings test and no benefit reductions based upon earned income.
Income tax implications
Social security benefits are subject to federal income taxes above certain levels of “combined income.” Combined income typically consists of your adjusted gross income, nontaxable interest, and a half of your Social Security benefits. For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,00, none of your Social Security is taxed.
Individual filers with combined income of $25,00 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
No more than 85% of your Social Security benefits will ever be subject to federal taxation regardless of your income level.
13 states also tax your Social Security benefits. The rules and exemptions vary widely across this group, so it’s wise to research the rules for your state.
Social Security and Medicare taxes
In addition to federal and possibly state income taxes, you’ll pay Social Security and Medicare taxes on any wages earned in retirement. There isn’t an age limit on these withholdings nor any exception for any sort of Social Security benefits status.
These earnings can also count toward the calculation of your benefits: Social Security checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.
If you’re making much less in retirement than before, it will not hurt your benefits because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact.
Important decision: When to claim Social Security
Deciding when to claim Social Security benefits will be one of the most important decisions that you make regarding your retirement, along with how to take retirement income from your various retirement accounts and how you will fund your health care needs in retirement. The following chart shows the difference for someone turning 62 in 2018. We’re going to assume his/her social Security benefit at full retirement age of 66 plus 4 months is $2,000. The first set of numbers on the chart shows the benefit amounts he or she would receive by claiming at various ages.
|Age when claiming benefits||Age 62||Age 66 + 6 months||Age 70|
|Monthly benefit as % of FRA benefit||70%||100%||128%|
Source: Benefit Reduction for Early Retirement, SSA.gov
You should be aware of a special rule for the first year of retirement. This rule allows you to get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings.
Going back to work – meet Christopher
In our example, Christopher is 64, retired at 62 from a plumbing supply company in the Chicago area, and claimed Social Security benefits as soon as he was eligible at 62. He misses his old working habits. He loves home improvement and helping people, so he found another job at a big box retailer. His wife is Arlene, she’s 61 and is working part time. Both have FRAs of age 66.
3 Social Security options for Christopher to consider
1. Filing a restricted application
Filing a restricted application means filing for a spousal benefit while leaving your own benefit untouched to grow as late as age 70. You can only file a restricted application if you were 62 before the end of 2015, you have reached FRA, and your spouse has filed for their benefit.
2. Social Security do-overs
Social security do-overs are allowed within 12 months of commencing benefit payments. In Christopher’s case, he missed his window for a do-over. You’re allowed one lifetime do-over, or withdrawal of benefits, and you must repay all benefits received. If you were having your Medicare premiums deducted from your Social Security Check, you need to repay those premiums, unless you decide to withdraw from Medicare coverage. If your spouse and children were collecting dependent benefits based on your earnings record, they must pay back these benefits and you’ll have to get their agreement in writing before you’ll be allowed to withdraw your application. When you resume benefits later on, they’ll be at the starting amount for your age and earnings record at that new time.
3. Suspending your benefit
This is allowed once you reach your FRA. Christopher can do this when he turns 66 if he chooses to. The advantage of this is that his benefit will be suspended at the level at the time of suspension, and it can now grow until he resumes taking it at any time until age 70, then it’ll reach its maximum level. The advantage for Christopher is the accrual of delayed retirement credits, which will result in a higher benefit level when he resumes his benefit. If you suspend your benefit, no one will be allowed to draw benefits off your work record while your benefits are suspended.
Advantages of working longer
Working in retirement can help in your retirement planning, especially if your savings are running a bit behind your goals. Continuing to work allows you to keep constructing retirement savings. If you meet the requirement, you can contribute to a 401(k) or other other tax-deferred workplace savings plan, a health savings account, and an IRA, even if you are collecting Social Security. You also can make catch-up contributions, which lets you set aside larger amounts of money for retirement. The combination of added savings, tax-deferred growth potential, the ability to delay claiming Social Security benefits, and the ability to defer tapping into your savings account can be very capable, even at the end of your working career.