Because the average American's income has made little headway over the past decade and employers have shifted away from pensions, many Americans have fallen behind on their retirement savings goals.

As a result, more people are choosing to supplement their Social Security income by continuing to work than ever before. Working later in life can be a good income-boosting strategy, but there's a hitch. Social Security can withhold some of your Social Security income if you earn more than $15,720 in 2016.

Calculator and pen sitting atop a financial statement with a coffee cup in the background

Image source: Getty Images.

The details
Not everyone will be subject to the $15,720 income limit, but the limit does apply to people who have decided to take Social Security before reaching their full retirement age, which is between 66 and 67 years old, depending on the year in which you were born.

If you take Social Security before full retirement age and earn more than the $15,720 threshold, then every $2 dollars you earn above that level reduces your Social Security income by $1.

For example, Sandy is a 62-year-old who is taking Social Security early and Sandy has decided to continue working.

Because Sandy is taking Social Security early, she will receive 25% of the monthly income she would receive if she had waited to collect Social Security until her full retirement age. For argument's sake, let's assume Sandy's Social Security income at her full retirement age would be $1,000 and that means she will collect $750 per month in Social Security income, or $9,000, this year.

Now, let's assume that Sandy will make $20,000 in wages from an employer or $4,280 more than the $15,720 limit. Because Social Security income is reduced by half that amount, or by $2,140, Sandy would receive $6,860 in Social Security income this year, rather than $9,000.

Importantly, the reduction in Social Security income isn't spread out across Sandy's monthly Social Security checks. Instead, Social Security will withhold Sandy's first three months of Social Security payments, or $2,250. The rest of her monthly payments will come to her as planned and will be in the previously expected amount

of $750. The extra $110 that was withheld from her ($2,250 minus the $2,140 reduction) will be paid to Sandy next year.

Don't panic
Before worrying that the U.S. government is about to profit by $2,140 because of your decision to keep working, know that the money that your Social Security income is reduced but isn't lost.

Instead, that money is held back and your monthly benefit at your full retirement age will increase to take into account the money that was withheld.

Additionally, remember that there's no income penalty associated with working after reaching full retirement age. This reduction in Social Security income only applies to recipients who are younger than full retirement age.

There is, however, one more caveat to keep in mind. If you reach full retirement age (age 66) in 2016, then Social Security will reduce your Social Security income by $1 for every $3 you earn above $41,880 until the month in which you reach full retirement age.

And another thing
Social Security doesn't penalize you for dividend income, interest, pensions, government payments, investment earnings, or capital gains. It only considers wages that are earned by working for an employer. If you're self-employed, then Social Security bases the calculation on net earnings, not gross earnings. Social Security does, however, count your contribution to a pension or retirement plan if it's included in your gross wages, so keep that in mind. If your situation is complicated or you're still unsure of how Social Security limits may affect you, contact Social Security or your tax planning professional for additional insight. 


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