Everyone knows the basics of Social Security: You pay taxes throughout your working years, and you get some of that money back in the form of a monthly check in retirement. But there are a lot of rules affecting the size of your benefit that people aren't as familiar with. Here are five important ones to bear in mind.
1. Full retirement age (FRA)
The government assigns a full retirement age (FRA) to you based on your birth year. It's 67 for most workers today, though some older adults could have a FRA as young as 66. Your FRA determines when you qualify for the primary insurance amount (PIA) you've earned based on your work history.
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Claiming before your FRA shrinks your checks by up to 25% if your FRA is 66 or 30% if your FRA is 67. For every month you delay benefits, your checks grow by anywhere from 5/12 of 1% to 2/3 of 1% until you reach your maximum benefit at 70. This is 124% of your PIA if your FRA is 67, or 132% if your FRA is 66.
This might make it appear as though delaying benefits is always the wisest move, but this isn't true. The right call depends on your life expectancy and financial situation. Those who don't expect to live past their 70s and those who need their Social Security checks to cover their expenses today will likely be better off claiming early. However, those who can afford to delay benefits and expect to live into their mid-80s or beyond may get a larger lifetime benefit by waiting to apply.
2. The earnings test
The Social Security earnings test withholds money from seniors' checks if they're claiming under their FRA and earning more than a certain amount from their jobs. In 2023, you lose $1 for every $2 you earn over $21,240 if you'll be under your FRA all year. If you reach your FRA in 2023, you only lose $1 for every $3 you earn over $56,520, should you reach this amount before your birthday. In 2024, these limits will rise to $22,320 and $59,520, respectively.
The money withheld isn't gone forever, though. The Social Security Administration recalculates your benefit at your FRA to include the money it previously withheld. This boosts your checks going forward. However, you won't receive as much as you would've gotten if you'd delayed Social Security until your FRA in the first place.
3. Social Security benefit taxes
The federal government taxes the Social Security benefits of seniors whose provisional incomes -- adjusted gross income (AGI), plus any nontaxable interest and half your annual Social Security benefit -- exceed $25,000 for a single individual or $32,000 for a married couple.
These taxation thresholds haven't changed in decades, and as the average Social Security benefit rises, more and more seniors find themselves paying these taxes. It's sometimes possible to avoid them by decreasing the amount you withdraw from tax-deferred retirement accounts, like traditional IRAs and 401(k)s, but this doesn't always work. If you cannot avoid Social Security benefit taxes, it's important to plan for them in your retirement budget so you aren't caught off guard.
It's also worth noting that some states tax Social Security benefits. Check with your state's department of taxation to learn about who may have to pay these taxes and how much you might owe.
4. Ex-spousal benefits
Many people know that current spouses can qualify for Social Security benefits on a worker's record, but not everyone is aware that ex-spouses can under certain circumstances as well. To do this, the couple must have been married for at least 10 years. And, if the worker hasn't yet signed up for benefits on their own, the couple must also have been divorced for at least two years for the ex-spouse to claim on the worker's record.
The ex-spouse must still be at least 62 for someone to claim ex-spousal retirement benefits, and they'll only receive this benefit if it's larger than the Social Security benefit they're entitled to on their own. To claim ex-spousal benefits, they'll need to show copies of their marriage and divorce certificates to the Social Security Administration.
5. Children's benefits
Minor biological or adopted children or grandchildren of qualifying workers may also claim Social Security benefits. The same goes for adult children who were disabled before age 22. Claiming benefits for any qualifying children in the household is a great way to increase the household's benefits, so it may be worth applying sooner rather than later if you're in this situation.
You'll need copies of the children's birth certificates or other documentation to prove their relation to the deceased worker to qualify. Talk with the Social Security Administration if you're unsure which documents you need.
This isn't a comprehensive list of Social Security rules, but hopefully it clarified a few common misconceptions about the program. Don't hesitate to reach out to the Social Security Administration if you have questions about your benefits. It's always better to take a few minutes to ask than to guess and risk a serious misunderstanding.
