Social Security is a complicated program, and it's easy to get confused about some of its more difficult-to-understand provisions. In particular, there are a few aspects of Social Security that many older Americans believe will take away a large portion of their benefits. In most cases, even when provisions of the program have a negative impact on your benefits, the size of that impact isn't as large as you might fear.
Let's look at three particular parts of Social Security that trip up many benefit recipients along with a more detailed explanation of how they actually work.
1. If you work and get Social Security, you'll have to forfeit your benefits.
Social Security is generally designed to replace income in retirement, but many people start taking Social Security before they retire. You can claim your benefits as early as age 62 regardless of whether you're still working, but there are provisions that require you to forfeit some or all of your benefits if you earn above a certain amount. However, the amounts involved are relatively high, and they also come with compensation that most people don't realize.
In particular, for 2017, if you're below full retirement age all year and make more than $16,920 in earnings from your job, then you'll have to forfeit $1 in annual benefits for every $2 you make above the threshold. Those who reach full retirement age in 2017 have a higher limit of $44,880, losing $1 for every $3 in earnings above the threshold, but only for earnings for that period of the year during which you're younger than full retirement age.
This sounds like a bad thing, but many people don't earn enough from a near-retirement job to surpass the threshold. Moreover, even if you do top the limits, you'll be treated as if you had claimed Social Security one month later for every month's worth of benefits you forfeit. That will result in larger monthly payments that can often in the long run more than make up for the immediate loss of benefits.
2. Multiple family members have a maximum amount of benefits they can receive.
Social Security pays benefits not just to retirees but to their families, with spouses and children often being entitled to receive money from the program. However, for large families, there's a maximum that Social Security will pay on one person's work history. That figure tends to work out to between 150% and 180% of the retired worker's primary insurance amount.
However, there are nuances to the limit. First, the worker's own benefits will never get cut -- only family members are subject to the limit. Second, if the worker is divorced and the divorced spouse receives benefits, those benefits don't count against the family maximum.
Most importantly, if you're entitled to benefits on your own account, then the family maximum need not apply. For instance, a working spouse who would otherwise have benefits cut because of the family maximum might be able to do better by claiming the spouse's own worker benefits, leaving more of the available family maximum to other family members. Being smart about integrating family decisions about Social Security is critical to ensure that you don't take an unnecessary hit.
3. If you make more than a certain amount, all of your Social Security benefits will get taxed.
Social Security benefits typically make up the lion's share of a person's retirement income, and therefore in most cases, they aren't subject to federal income tax. Only if total income -- defined as one-half of Social Security benefits plus other income sources such as retirement account distributions, investment income, and work income -- exceeds certain limits will a portion of benefits get taxed.
However, you should understand exactly how this provision works. Under the worst-case scenario, 85% of benefits can get included as taxable income. For most people, though, the provisions leave much more of their benefits untaxed. By being smart about taking taxable distributions from 401(k) plans or other retirement income, you can often reduce or eliminate the tax impact of including Social Security benefits as income.
Don't fall for these myths
Many people get scared about Social Security's provisions that limit or take away benefits, but in most cases, the reality isn't as bad as the fear. By understanding fully the things that can have a negative impact on what you get from Social Security, you'll be better able to take steps during your career to avoid them or at least mitigate their long-term impact.
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