Social Security is a critical component of many Americans' retirement plans, providing a steady stream of income to supplement other sources like 401(k)s and personal savings.
However, navigating the complexity that is Social Security can be daunting, and many people may be unaware of lesser-known provisions that could significantly affect their benefits.
Here are three easy-to-overlook Social Security rules that could help you maximize your retirement income and avoid potential pitfalls. Understanding these rules can empower you to make informed decisions and ensure you're getting the most out of your hard-earned benefits.
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1. The earnings test exception
Many folks may assume that earning income while drawing Social Security will mean your benefits will be reduced. That's true, if you retire before what the Social Security Administration (SSA) calls your full retirement age (FRA).
It depends on your birth year, but FRA right now maxes out at 67. If you begin collecting before that and continue to work or otherwise draw income, your benefit will indeed be reduced. The amount is based on the earnings test.
The effect will vary, but for this year, the SSA says this: "If you're younger than full retirement age during all of 2024, we must deduct $1 from your benefits for each $2 you earn above $22,320." In your FRA year, the SSA will deduct $1 in benefits for every $3 earned above $59,520.
In that latter case, the SSA only counts the earnings up to your FRA month, not for the whole year, so there's that. For that, there's an exception for those who retire during the year but have already exceeded the earnings limit at that point. Under that rule, you can get a full check for any whole month you're retired, regardless of your earnings for the year.
2. The do-over option
Deciding when to begin drawing Social Security doesn't have to be a final decision. If you've already started receiving that monthly entitlement but later realize you would have been better off waiting, you may be able to do it all over again.
The do-over option allows you to withdraw your Social Security claim and reapply at a later date, potentially increasing your monthly payout. You must make that application within 12 months of first being approved for benefits, and you have to pay back what you've already received from Social Security in full.
3. Moving abroad? You can (probably) take it with you
Thinking about moving abroad? There'll be lots to leave behind if you do, but that doesn't have to include your Social Security.
The SSA says U.S. citizens can keep receiving payments while outside the U.S. as long as it's a country where payments can be sent and the recipient is still eligible for payment.
That includes most places Americans would be moving to, presumably, unless your plans include Cuba, North Korea or, with some exceptions, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, or Uzbekistan.
Better yet, there are 30 countries that have agreements in place with the U.S. to avoid double taxation on your benefits. Along with countries that have notably generous incentives, that list includes Australia, Japan, United Kingdom, Canada, Mexico, Spain, and all the Scandinavian countries.
Your Payments While You are Outside the United States (May 2023) (ssa.gov)
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Knowledge empowers. The rules are no secret.
Remember, knowledge is power when it comes to retirement planning, including something that should seem as simple as choosing the right time to claim Social Security benefits to which you're entitled.
By understanding strategies like the restricted application, the do-over option, and the earnings test exception, you can potentially increase your retirement income and avoid costly mistakes. These rules can easily fly under the radar, too.
The rules and regs are there for anyone to read, but don't hesitate to call on the advice of an experienced financial planner and/or tax attorney who's far more familiar with those complexities. That trusted advisor can help you make the most informed decisions around your financial goals and plans for a secure retirement.
