The Earnings Test
Retirement shouldn’t be the time we have to face more tests! Unfortunately, there is one more test that doesn’t end until you reach your Full Retirement Age. It’s called the Social Security Earnings Test, and it’s one of three ways your monthly benefit can be reduced or eliminated. (The other two are having a pension from work not covered by Social Security, and taxes. This article discusses only The Earnings Test.)
The earnings test is not a tax. Rather, it is a direct reduction in benefits. The earnings test applies to individuals who begin receiving payments before reaching Full Retirement Age (FRA). If you begin receiving benefits in years before reaching FRA and you have earned income, $1 will be deducted in benefits for every $2 of earned income above the annual earnings limit. This deduction continues in the same manner until the beginning of the year you will reach FRA when benefits may be reduced by $1 for every $3 of earned income above the annual earnings limit. Once reaching FRA, individuals can receive full benefits with no limit on earnings.
|2010 Earnings Test|
|At full retirement age or older||No limit on earnings|
|Under full retirement age||$14,160 / For every $2 over the limit, $1 is withheld from benefits.|
|In the year you reach full retirement age||$37,680 / For every $3 over the limit, $1 is withheld from benefits until the month you reach full retirement age.|
As an example, suppose Mary begins receiving Social Security benefits at age 62 in January 2010 and is entitled to $1,000 a month ($12,000 for the year) in Social Security benefits. During the year, she earns $30,160, which is $16,000 over the $14,160 limit. Social Security would withhold $8,000 (or $1 of benefits for every $2 in income earned over the limit) and she would only receive $4,000 in benefits ($12,000 – $8,000).
Let’s change the example. Suppose Mary is 65 at the beginning of the year, but reaches her FRA in October 2009. She would receive $1,000 a month in benefits before the earnings test. She earns $45,000 from January through September—the month before reaching FRA. She would have $2,440 of benefits withheld ($1 for every $3 earned through September above the $37,680 limit). This equates to a reduction of about $203 of benefits for each month from January through September. Beginning in October when she attains FRA, she would receive full benefits since the earnings test no longer applies.
As a rule of thumb, people with earned income exceeding the applicable limit should seldom begin receiving Social Security before attaining FRA. The earnings test is based on earned income which includes wages, salary, and self-employed income. It does not include interest income, dividends, capital gains, withdrawals from a 401(k), 403(b), traditional IRA, Keogh and other deductible pensions, or withdrawals from non-qualified tax-deferred annuities.
Let us help you pass The Earnings Test with advice and counseling on your Social Security options. Start with our free, no-obligation Social Security Snapshot Report.