Waiting to claim at 66 escapes benefit claw back, but not taxes
My interview on National Public Radio's Morning Edition program earlier this week and a recent rebroadcast of my Social Security special on the PBS WealthTrack program has touched off a flood of e-mails and phone calls from consumers. Their questions offer some insights into how financial advisers might address their clients' concerns about the best time to claim benefits.
A recurring question involves the earnings cap. That's the rule that restricts how much an individual can earn from a job while collecting Social Security benefits before full retirement age. For 2013, individuals lose $1 in benefits from every $2 they earn over $15,120.
Essentially that means if you earn $45,360 or more this year while collecting Social Security benefits before your full retirement, all of your benefits will be withheld. Once you reach your full retirement age, you can collect benefits while still working without any reduction.
The earnings cap claw back is a deferral rather than a permanent penalty. Once you reach full retirement age, the Social Security Administration will recalculate your benefits to take into account any amount you forfeited to the earnings cap.
Typically, I tell consumer and adviser audiences: “After you turn 66, you can earn as much money as you like without penalty.” That statement seems to have sparked some confusion.
“Is it really true that I should be able to keep all of my earnings as well as all of my Social Security money?” one WealthTrack viewer named Sharon asked. “My tax preparer says I cannot keep all of what I am earning… because I earn too much.”
Sharon was not alone in confusing the earnings cap penalty, which disappears at full retirement age, with taxes on Social Security benefits, which applies regardless of age if provisional income tops $25,000 for individuals or $32,000 for married couples. Provisional income includes one half of Social Security benefits plus all other income, including tax-exempt income.
Several consumers wrote with similar complaints that they were being penalized by having to pay taxes on some of their Social Security benefits even though they were 66 or older.
As I explained to each of them, once you reach your full retirement age — currently 66 for those born from 1943 through 1954 — you can continue to work while collecting Social Security with no reduction in benefits due to the earnings. But depending on your income, you may have to pay taxes on those benefits for the rest of your life.
