If you plan to keep working after claiming Social Security benefits, it's important to know how the "earnings test" works. Whether you stay in your current position, find a new job, work part-time, or start your own business, earning money could affect your benefits.
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Who's affected
When a Social Security recipient continues to work, the Social Security Administration (SSA) employs an earnings test. However, the earnings test applies only if you begin collecting Social Security benefits before your full retirement age (FRA). For anyone born in 1960 or later, FRA is 67.
If you've reached FRA and want to keep earning money, your job won't affect your monthly benefit payments. If you made an early claim, though, here's what you need to know.
Earnings test
When you continue to work or go back to work after claiming Social Security, the SSA conducts an "earnings test" and may withhold a portion of your monthly benefit amount. However, that's only after you've earned a certain amount of money.
Before FRA
Unless it's during the calendar year you turn FRA, you can earn up to $24,480 in wages or self-employment income without any reduction in your Social Security benefit. Once you've passed that income cap, the SSA will withhold $1 in benefits for every $2 earned over the threshold.
Let's say you earn $44,480 -- or $20,000 over the income threshold. The SSA would withhold $10,000 in Social Security benefits ($20,000 ÷ 2 = $10,000).
The year you reach FRA
Imagine that you're still working the year you turn 67, and your birthday is in July. For that calendar year, there's a more generous limit of $65,160 applied to the earnings test. Better yet, the SSA counts only earnings received in the months before you reach FRA.
If you don't earn $65,160 before your birthday month, the SSA won't withhold any money from your Social Security benefits. However, if you earn more than $65,160 during that time, the SSA will withhold $1 for every $3 earned above that amount. For example, if you earn $85,160 -- $20,000 above the threshold -- the SSA will withhold $6,666.67 from your benefits ($20,000 ÷ 3 = $6,666.67).
After you reach FRA
Beginning the month you hit FRA, the earnings limit goes away entirely, and there's no cap on what you can earn and still receive full benefits.
It's not a loss
While having money withheld from your Social Security checks may be a pain, it's not actually a loss. Once you reach FRA, the SSA recalculates your benefits and makes adjustments to boost your monthly benefits. Over time, that can add back the money it previously withheld.
Thresholds change each year, so it's a good idea to watch SSA announcements, which are typically released in mid-October.
No matter why you stay in the workplace, it's good to know what to expect in terms of monthly benefits and when withheld benefits will be added back to your checks.
