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Many people wonder whether they can continue to work while collecting Social Security benefits. The answer is yes, but there are a few things to be aware of.
Your full retirement age (FRA)
Your FRA is a key part of determining how working can impact your Social Security benefits. Full retirement age is the age at which you are eligible for unreduced benefits. For those born from 1943-1954, their FRA is 66. For those born in 1955 it is 66 years and two months. FRA increases by two months for each birth year after that until it reaches age 67 for those born in 1960 or later.
Annual earnings limit
The Social Security Administration establishes an annual earnings limit for those who are receiving benefits and have not reached their FRA. For 2022, this limit is $19,560. For every $2 of earned income over this limit, your Social Security benefit would be reduced by $1. Earned income means income from employment or self-employment. It does not include interest or dividend income, income from investments or from a pension or an annuity.
For example, if your earned income is $24,560, the benefit reduction would be $2,500.
In the year that you reach your FRA, the 2022 earnings limit is $51,960 with a benefit reduction of $1 for every $3 of earned income over this limit.
Once you reach your FRA, there is no benefit reduction regardless of the amount of earned income that you have.
What happens to benefits withheld?
Benefits withheld due to earnings exceeding the annual earnings limit in the years before reaching your FRA are not lost to you. Rather, once you reach your FRA you receive credit for any benefits withheld. These withheld benefits will be returned to you in the form of higher benefit payments.
Read: Fix the unfair GPO calculation within Social Security
Tax considerations
Social Security benefits can be subject to federal income taxes, regardless of whether or not you are working. Whether or not your benefits are taxed depends on your overall income. Working can, however, push you into a higher tax level for your benefits.
Taxes on Social Security benefits are based on your level of combined income. This includes your adjusted gross income (AGI) from your tax return plus any tax-exempt interest income earned plus one-half of your Social Security benefits for the year.
For those filing as single:
- If your combined income is between $25,000 and $34,000 you may have to pay taxes on up to 50% of your benefits.
- If your combined income is over $34,000 you may have to pay taxes on up to 85% of your benefits.
For those filing as married and joint:
- If your combined income is between $32,000 and $44,000 you may have to pay taxes on up to 50% of your benefits.
- If your combined income is over $44,000 you may have to pay taxes on up to 85% of your benefits.
According to the Social Security Administration, those who are married and file separately will generally be required to pay taxes on their benefits.
Currently there are 12 states that tax Social Security benefits in some fashion.
Withdrawal of benefits
This is a once per lifetime “do over” for Social Security benefits. Let’s say you had stopped working and started taking your benefits at age 63. Six months later you’re bored or you decide you need the income from working. You can file the form to do a withdrawal of benefits.
This must be done within 12 months of initially commencing your benefits. Social Security will treat this as if you had never applied for benefits. However, you must repay every dollar received as a benefit including:
- Retirement benefits received by you.
- Any benefits received by your children or your spouse under your earnings record. They must consent to the withdrawal of benefits in writing.
- Any money that was withheld from your benefits, for example to pay Medicare premiums.
You can then file to claim benefits at a later date, perhaps when you reach your FRA or when you’ve decided to quit working.
Should I claim benefits if I am working?
This answer to this question depends on your situation. The main driver will be whether you need the money from the benefits to maintain your desired lifestyle. If your income from working doesn’t exceed the annual earnings limit by a large amount, then it probably doesn’t matter that much.
However, if your earned income from working exceeds the annual earnings limit by a considerable amount, then it may not make sense. While you will receive the benefits that were withheld once you reach your FRA, it may make sense just to wait until your FRA or longer to claim your benefits as the initial amount increases for each year you wait until your benefits max out at age 70.
One other thing to note, earned income while receiving benefits will still count as part of your lifetime earnings record. Your benefits are based on your 35 highest earnings years, if one or more of the years while receiving benefits would replace a prior year on your lifetime earnings record, this can help boost your future Social Security benefits.
The decision when to claim Social Security benefits is an important one for retirees. Their family situation is one factor in this process. Whether or not they are working is a key consideration.
