Millions of seniors become dependent on Social Security once they stop working and enter retirement. And even if you amass a pretty nice-sized nest egg, you may still end up depending heavily on those benefits to cover your living expenses.
But some of Social Security's less obvious rules could end up throwing your retirement plans off course. Here are a few key points you may find shocking.
1. Benefits can be taxed
Many people are used to paying into Social Security in the form of payroll taxes. But you may be surprised to learn that once you start collecting benefits of your own, you may lose a chunk of that income to taxes.
Whether that happens will hinge on your provisional income, which is the sum of your non-Social Security income plus 50% of what you collect in benefits each year. You need to worry about taxes when:
- You're single and your provisional income reaches $25,000
- You're married and your provisional income reaches $32,000
As you can see, these aren't very high income thresholds. And worse yet, they also haven't budged in years, despite the fact that inflation has made the cost of living higher since they were established.
Another thing you should know is that there are 13 states that impose their own taxes on Social Security benefits. And while some offer exemptions for low or even moderate earners, others don't offer an exemption at all.
2. Benefits can be withheld if you earn too much
The Social Security Administration will allow you to collect benefits even if you're still working. And once you reach full retirement age, or FRA, you can do so without that impacting your benefits whatsoever.
But if you work and collect benefits simultaneously before reaching FRA, you could risk having some benefits withheld if your earnings exceed a certain threshold that changes every year. In 2022, you can earn up to $19,560 without any impact on your benefits. From there, you'll have $1 in Social Security withheld for every $2 you earn.
If you'll be reaching FRA in 2022, that limit increases to $51,960, so you get a bit more leeway. But from there, you'll have $1 in Social Security withheld for every $3 you earn.
Withheld benefits aren't forfeited -- they're returned to you once you reach FRA in the form of higher monthly benefits. But claiming benefits ahead of FRA reduces them on a permanent basis. And if you earn too much money, you'll risk a scenario where filing early means shrinking your benefits for life and also not getting to collect all of that money up front.
3. Spousal benefits can't be grown
Even if you never worked, you may be entitled to spousal benefits from Social Security in retirement based on a spouse or former spouse's earnings record. But once you reach FRA, you might as well sign up for them. If you don't, you'll just be denying yourself money you could've gotten.
When you're claiming Social Security on your own earnings record, you can grow your benefits by delaying your filing beyond FRA. But that doesn't work if you're in line for a spousal benefit, so there's no sense in not signing up once FRA arrives.
Go in prepared
No matter what role Social Security ends up playing in your retirement, it's important to know the program's ins and outs. Take some time to learn about Social Security's many rules so you're not thrown for a loop later in life.