Making more money is usually considered a good thing. But when you’re retired, high paychecks can negatively affect your Social Security income. In particular, you could temporarily or permanently give up some benefits if you make too much money.
How can you make a lot of money if you’re a Social Security retiree? Here are two main ways.
1. You may lose some benefits if you work before you reach full retirement age
It may come as a surprise, but if you take a job as a retiree and make too much money from a job, the government will start withholding some of your money. Social Security Checks. This rule applies to you only if you haven’t reached you yet full retirement age (FRA), which is between 66 and four months and 67.
How much is too much? It depends on whether you will hit FRA sometime in the year you work or not. If you don’t hit FRA at all, you will lose $1 in benefits in 2022 for every $2 earned over $19,560. If you reach FRA at any point in the year, you will lose $1 in benefits for every $3 earned over $51,960.
Full checks are withheld when you lose benefits by working. For example, if you receive Social Security income of $1,500 each month and end up losing $3,000 in benefits, you won’t get a check for two months. Then when you reach FRA you will be charged back early filing penalties for the months you didn’t get checks. Since this will increase your payment amount, you will eventually recoup the forfeited benefits in the form of increased monthly income – if you live long enough.
Not everyone breaks, even if they lose benefits. And even if you get more money later, that might not help you now if you find your Social Security checks disappearing because of your paycheck.
2. You May Be Affected by Social Security Taxes
There is another important reason why earning more can lead to a lower benefit. You may find your Social Security checks subject to federal or state tax if your income creeps above a certain threshold.
State Tax Rules vary when the government cuts some of your Social Security, but the IRS rules are clear and don’t change from year to year. Once provisional income (half your Social Security benefits plus all taxable and some non-taxable income) exceeds $25,000 for single-tax filers or $32,000 for joint filers, a portion of your distributions will be taxed. The more you earn, the higher the percentage of taxed benefits. Ultimately, you could be taxed up to 85% of all benefits if you earn enough.
About half of all seniors end up with a tax benefit. If you become one of them because you earn more this year, you could lose purchasing power because you give a larger portion of your income to the IRS.
It is important to plan for any loss of benefits that occurs, even if it is temporary. If your income is up this year or you are otherwise concerned that your total retirement income is high enough for these rules to apply, take the time to understand the applicable IRS regulations so you can set realistic goals for how much home income Social Security will provide.