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Outside the Box: Have you claimed Social Security and then gone back to work? You may face the ‘earnings test’

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If you’ve claimed your Social Security retirement benefits and continue working or return to work before you reach your full retirement age (FRA), you need to be aware of the earnings test.

As more baby boomers are working longer, they may encounter the Social Security earnings test without knowing it. Say you’ve claimed your Social Security at 62 or soon thereafter, and either continue working or return to work at a significant salary at 65. Since you haven’t yet reached your FRA of between 66 and 67, you’ll face the earnings test.

If you earn more than a certain amount, report your anticipated earnings to the Social Security Administration right away. 

“There’s a limit until you are full retirement age,” says Nancy Altman, president of Social Security Works, a nonprofit advocacy group. She is the author of several books, including The Truth About Social Security.

For 2021, that limit is $18,960 for those under their FRA. During the year you reach your FRA, the limit on earnings is $50,520 for 2021, up until the month of the birthday when you turn your FRA. If you’re earning more than you expected at work, let the Social Security Administration (SSA) know immediately by calling 1-800-772-1213. This cannot be done online. 

If you are receiving Social Security retirement benefits and also earn more than the certain threshold cited above from working, Social Security will withhold some of your Social Security retirement benefits, but will credit them to you later. 

In addition, if you are earning a lot more than the allowed amount before you reach your FRA and you fail to notify the SSA so your benefits can be adjusted, you will be required to return the overpayment. If that happens, you will receive a letter from the SSA detailing how much you owe. If you don’t pay it back, it can be withheld from your future Social Security retirement benefits. “Whenever you get any official letter and you owe money, if you don’t have that money in your bank account it can be very scary,” Altman says.

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(However, if you have claimed Social Security and then changed your mind, you can also suspend your Social Security retirement benefits as long as you have reached your full retirement age and are younger than 70. You’ll earn delayed retirement credits for each month your benefits are suspended, and that will result in a higher benefit payment to you.)

Here’s the main rule for the earnings test: If you haven’t yet reached your FRA, the Social Security Administration will withhold $1 for every $2 in earnings you have above the annual limit, which is $18,960 for 2021. In the year you reach your FRA, the SSA will withhold $1 for every $3 you earn over the annual limit of $50,520, the limit for the year 2021 until the month you reach your FRA.  

It’s important to know what your full retirement age is. If you were born between 1943 and 1954, full retirement age is 66. If you were born after 1954, your full retirement age increases to between age 66 and 67.

• If you were born in 1955, your FRA is 66 and 2 months.

• If you were born in 1956, your FRA is 66 and 4 months.

• If you were born in 1957, your FRA is 66 and 6 months.

• If you were born in 1958, your FRA is 66 and 8 months.

• If you were born in 1959, your FRA is 66 and 10 months.

• If you were born in 1960 or later, your FRA is 67.

If you are employed, only your wages from work count toward Social Security’s earnings limits. If you are self-employed SSA only counts your net earnings. SSA does not count income such as other government benefits, investment earnings, interest, pensions, annuities, and capital gains. 

Just because there is an earnings limit until you reach your FRA doesn’t mean you can’t work and earn money while receiving Social Security retirement benefits. It does mean that you have to be aware of the limits. Even if some of your Social Security retirement benefits are withheld, in the long run earning more money can result in higher benefits for you once you reach your FRA.

Here is an example: Say you’re 65, and you are receiving Social Security retirement benefits of $800 a month or $9,600 a year in 2021. Meanwhile, you’re offered a job during 2021, you take it and earn $28,960, which is $10,000 more than the $18,960 limit for 2021, for those who have not yet reached their FRA.

According to SSA, your Social Security retirement benefits would be reduced by $5,000, which is $1 for every $2 you earned above the limit. In this case, you would receive $4,600 of the $9,600 you were originally eligible to receive. The calculation is $9,600 – $5,000 = $4,600.

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There are detailed special rules for the first year you claim benefits before you reach your FRA, says Russell Gloor, a national Social Security adviser with the AMAC Foundation. “If you’ve already reached your FRA there is no earnings limit.”

If you prefer to work, don’t let the earning test stop you. “If you want to work while receiving benefits between ages 62 and FRA, then work, says Jason Fichtner, senior lecturer, department of economics and finance, Johns Hopkins University School of Advanced International Studies. “Don’t let the RET (retirement earnings test) discourage you from working. Proactively reach out to SSA directly if you are both receiving Social Security retirement benefits and working.” Describe your particular situation, and report any earnings you expect from work. The SSA should be able to make the benefit adjustment within 30 days of your call, Fichtner says. Make sure it happens. If you believe you’re still receiving more than you’re eligible for, call again to confirm.

The key is to anticipate earnings, and report them in advance, if possible. “It’s important to note, that even if benefits get reduced due to working while receiving benefits between age 62 and FRA, you will get credit for working and those benefit amounts get included in recalculating the monthly benefit amount once you reach FRA. The reduced benefits are ‘withheld.’ The RET (retirement earnings test) is not a tax,” Fichtner says.

A final warning: Each year your employer and the Internal Revenue Service report earnings to the SSA. If you haven’t reported your anticipated earnings, once the SSA has this information and if you’ve been overpaid, you’ll receive a letter letting you know.

In short, as soon as you suspect you may be receiving too much in benefits because of your work earnings, make the phone call. It’s the best way to prevent receiving an overpayment letter from SSA in the future.  

Harriet Edleson is author of the forthcoming book, “12 Ways to Retire on Less: Planning an Affordable Future” (Rowman & Littlefield, May 2021). A former staff writer/editor/producer for AARP, she writes for The Washington Post Real Estate section.

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