Social Security earnings limit clarified

B y now, most InvestmentNews readers know that collecting Social Security benefits before full retirement age while still working can result in reduced benefits — or even wipe out benefits completely — if earnings from a job significantly exceed the annual limit. For 2013, individuals who are younger than their full retirement age for the entire year lose $1 in benefits for every $2 earned over $15,120. Those who reach their full retirement age of 66 this year are subject to a more generous earnings cap: they lose $1 in benefits for every $3 earned over $40,080. But Social Security benefits forfeited to the earnings cap aren't gone forever. They are merely deferred. Once you reach your full retirement age, the Social Security Administration will recalculate your benefit to take into account the amount lost to the earnings cap. I received a great question from an adviser last week asking how much of earned income actually counts toward the earnings cap. One of his clients, a 62-year-old woman, is still working and earns $30,000 a year. However, she contributes half of her gross income —$15,000 — to her 401(k) plan, reducing her adjusted gross income to $15,000. The adviser wants to know if she could collect Social Security benefits without being affected by the earnings cap, since her AGI is less than the annual earnings cap restrictions. It's a logical question, but the answer is no. Social Security earnings cap restrictions apply to gross wages or salaries before any deductions for retirement plan contributions, according to the SSA publication “How Work Affects Your Benefits.” If she collected Social Security benefits this year, she would lose up to $7,440 in benefits. ($30,000-$15,120 = $14,880/2 = $7,440). If you are self-employed, SSA counts only net earnings from self-employment. The earnings cap does not apply to unearned income such as other government benefits, investment earnings, interest, pension, annuities and capital gains. Mary Beth Franklin is a contributing editor at InvestmentNews. [email protected] Twitter: @mbfretirepro