Many people choose to take Social Security benefits before they reach their full retirement age. With benefits available to most people as early as age 62, you don't even have to wait until you've formally retired to start getting a helping hand from the federal government.

However, there's a provision in Social Security law that many people don't know about. If you have earnings from work while you're receiving early Social Security benefits, then you can end up forfeiting some or all of your monthly Social Security checks if you make too much money. Below, you'll learn the specifics of Social Security forfeiture and what you can do to avoid losing any of your hard-earned benefits.

Two Social Security cards around a $100 bill.

Image source: Getty Images.

The basics of Social Security forfeiture

Social Security has an earnings test that anyone who receives retirement benefits before they reach full retirement age has to meet. If you make more than the allowed threshold amount of earnings, you'll have to give up a portion of your benefits.

For 2018, there are two separate earnings tests to be aware of. If you're not going to reach your full retirement age at any point during 2018, then the number you need to remember is $17,040. Make more than that in earnings and you'll lose $1 in annual benefits for every $2 that you're above the threshold. For example, if your earnings are $20,000 for the year, then you make $2,960 over the limit, so you'll lose half that, or $1,480, in annual benefits.

There's a different threshold for those who reach their full retirement age at some point during the year. A higher earnings threshold of $45,360 applies to those workers. Above that, you'll lose $1 in annual benefits for every $3 you exceed the threshold. Also, you only have to include earnings from the months before you reach full retirement age against the $45,360 threshold -- if you keep working past full retirement age, any further earnings don't count.

Finally, there's a special consideration for those who first claim their Social Security benefits in the middle of the year. For instance, if you turn 62 in November, then Social Security will look at your earnings in the last two months of the year and compare them against the pro-rated amount of $1,420 per month. That way, you don't have to worry about having made too much early in the year when you weren't actually eligible for benefits, as long as you cut back earnings after you actually claim your monthly Social Security payments.

The consequences of Social Security forfeiture

Once the Social Security Administration (SSA) finds out that your earnings exceed the threshold amounts, it will start applying the reductions. You can report this yourself, but if you don't, then the SSA will find out when it gets a copy of the W-2 form that you receive from your employer.

There's a positive trade-off that you receive in exchange for forfeited benefits. For every month's worth of benefits that you lose due to forfeiture, you're treated as having started getting your benefits one month later than you actually did. The net impact of this is that your benefit checks will rise slightly -- and there's even a possibility that the increased amount will more than make up for the amount of money that you forfeited.

How to avoid forfeiting Social Security benefits

There are a few ways that you can avoid worrying about Social Security forfeiture:

  • Work until full retirement age and then claim your benefits. At that point, you can earn as much as you want and not forfeit any of your Social Security.
  • Wait to claim Social Security until after you've stopped working. Once you've formally retired and stop bringing in money, you won't forfeit any benefits -- even if money you've earned earlier in that year would otherwise take you over the annual earnings threshold.
  • Withdraw your Social Security application. If you start getting benefits but then find out within the first 12 months that you're going to forfeit some of your Social Security, you can file Form SSA-521 to withdraw your application. You'll be treated as if you'd never applied, but you'll have to pay back any benefits that you received.

It's no fun to forfeit your hard-earned Social Security benefits. But by knowing that these provisions exist, you'll be better prepared to do what it takes to avoid having to give back some of what the SSA pays you.