InvestmentNews readers ask the best questions. Tom Milinovich, a financial adviser and certified public accountant from Waynesboro, Pa., asked how the Social Security earnings test is applied to people younger than full retirement age if they retire in mid-year.
Generally, you can get Social Security retirement or survivors benefits and work at the same time. But, if you are younger than full retirement age and earn more than certain amounts, your benefits will be reduced.
It is important to note that these benefit reductions are not truly lost. Your benefit will be increased at your full retirement age to account for benefits withheld due to earlier earnings. (However, spouses and survivors who receive benefits because they have minor or disabled children in their care do not receive increased benefits at full retirement age if benefits were withheld because of work.)
If you are younger than full retirement age during all of 2014, the Social Security Administration will deduct $1 from your benefits for each $2 you earn above $15,480.
“How much wages can you receive in the year you file for benefits before the month of filing?” Mr. Milinovich wrote in an e-mail. “Does the $15,480 earnings limit for the year include the wages earned before the person files for benefits?”
Good question. The answer is no — with qualifications.
Sometimes people who retire in midyear already have earned more than the annual earnings limit. That is why there is a special rule that applies to earnings for one year, usually the first year of retirement. Under this rule, you can get a full Social Security check for any whole month you are retired, regardless of your yearly earnings.
In 2014, a person younger than full retirement age for the entire year is considered “retired” if monthly earnings are $1,290 or less. That monthly figure is based on dividing the annual earnings limit of $15,480 by 12.
For example, let's say Mr. Milinovich's client John Smith retires at 62 on Oct. 30, 2014. He will earn $45,000 through October. Then he takes a part-time job beginning in November, earning $500 per month. Although his earnings for the year substantially exceed the 2014 annual limit of $15,480, he will receive a Social Security payment for November and December because his earnings in those months did not exceed the monthly limit of $1,290.
If, however, Mr. Smith earns more than $1,290 in either November or December, he will not receive a benefit for those months. Beginning in 2015, only the annual limit (which is increased for inflation each year) would apply to him.
If your client reaches full retirement age during 2014, a more generous earnings test applies. SSA will deduct $1 from your benefits for each $3 you earn above $41,400 until the month the client reaches full retirement age. The earnings restrictions disappear at full retirement age, meaning clients age 66 or older can earn any amount without losing any Social Security benefits.
If you work for someone else, only your wages count toward Social Security's earnings limits. If you are self-employed, Social Security counts only your net earnings from self-employment.
For the earnings limits, Social Security does not count income such as other government benefits, investment earnings, interest, pensions, annuities and capital gains. However, SSA does count an employee's contribution to a pension or retirement plan if the contribution amount is included in the employee's gross wages.
If you work for wages, income counts when it is earned, not when it is paid. If you have income that you earned in one year, but the payment was made in the following year, it should not be counted as earnings for the year you receive it. Some examples are accumulated sick or vacation pay, and bonuses.
If you are self-employed, income counts when you receive it — not when you earn it — unless it is paid in a year after you become entitled to Social Security and earned it before you became entitled to benefits.
(Questions about Social Security? Find the answers in my new ebook available at www.investmentnews.com/MBFebook for $19.95.)