What happens to my Social Security income if I continue working after retirement?

It depends on how old you are…..

Working after retirement can impact your Social Security benefits, health insurance and taxes.
You can contribute to a IRA or Roth IRA with you earned income

If you decide to go back to work after you have started Social Security benefits, this could impact the amount of Social Security that you will receive and your Medicare and tax payments.

Whether your Social Security income is reduced depends on your age. For benefit purposes, the Social Security Administration (SSA) defines the full retirement age as 66 for people born between 1/2/1943 and 1/1/1955. So let’s assume that you are under age 66 and you go back to work…

How much can you make in retirement and still get Social Security benefits if I am under 66?

If you are under full retirement age for the entire year, Social Security is reduced $1 from your benefit payments for every $2 you earn above the annual limit. For 2016, that limit is $15,720.

Example #1:

You are under age 66 all year and you get $1,000/month from Social Security, and you make $25,720 at a part time job. This is $10,000 over the 2016 limit of $15,720.

Your Social Security benefits would now be REDUCED by $5,000, or $1 for every $2 you earned over the limit. Since you are $10,000 over this limit. Your total income is $5,000 SS + $25,770 part time job = $30,770. If you are single, your total taxable income will be, _________, and your total taxes would be __________

What happens when you reach the full retirement age of 66?

In the year you reach full retirement age, Social Security is reduced $1 in benefits for every $3 you earn above $41,880. Social Security only counts the money that you earn before you turn 66, so if you have an early calendar year birthday in January or February then your benefits are only reduced in the months before you turn 66. In 2016, the limit on your earnings before you turn 66 is $41,880. Once you celebrate the big 66, you can make as much as you want without having a reduction of SS benefits! 85% of which could be included in your taxable income at a 46% rate (TAX TORPEDO), and your Medicare Part B and D premiums could quadruple, but that is for another post…..

Example #2:

Same as #1, but You turn 66 and reach full retirement age in August 2016. Your Social Security benefits should be $1,000/month or $12,000/year and you make $63,000 during the calendar year with $44,000 being paid out in the 1st 7 months of the year, January-July. You made $2,120 over the year you turn 66 limit of $41,880. Your Social Security benefits will be reduced from January to July by $706, $1 for every $3 that you made over the limit.

Limit: $41,880

You made: $44,000 before the month that you turned 66

Overage: $2,120

Reduction in SS benefits: $2,120 overage/ $3 Social Security reduction divisor = $706 total Social Security reduction

Instead of getting $12,000 of Social Security benefits for the year, you get $11,294. Your Social Security benefits are not reduced August-December. They will be taxed though….

What income counts toward my Social Security reduction of benefits if I work in retirement?

Social Security only counts the wages that you make from your job, or your net profit if you’re self-employed.

They include:

Bonuses
Commissions
Vacation Pay

They don’t include:

Pensions
annuities
investment income
interest
VA or government benefits

As you continue working, your additional earnings will count towards your Social Security monthly benefit calculation, which means that your monthly Social Security payment could increase! If your benefit is wiped out before age 66 because you made a significant amount over the threshold, then Social Security will credit you for the months that you did not receive a benefit, and would increase your benefit amount.

Remember, by working in retirement, you could also could contribute to an regular IRA account, a Roth account, or even an Health Savings Account if you are not on Medicare. Sweet Deal!

What do I do now?

Social Security is one of the largest and most valuable assets that you will have in retirement, if you look at the present value of all of your future Social Security payments in retirement for the next 25-30 years, it could be worth $900k to over $2 million dollars depending if you are single or marred. ($2,500/month X 12 X 30 years for single person)

Tragically, the vast majority of Social Security recipients do not do any type of pro-active tax planning when it comes to the amount their Social Security benefits that are included in their taxable income, and they end up paying hundreds of thousands of dollars over their retirement life in additional income taxes because of it

TAX PLANNING EXAMPLE

Let’s look at a 66 yr old married couple who needs $100k gross income in retirement. They get $48,000 in combined Social Security income, and take $52,000 out of their IRA to equal $100,000. Their total tax payable would be $9,734. Without proper tax planning in retirement, 69% of their Social Security benefits, or $33,200 is included in their taxable income. Remember, this is the same Social Security that there were already taxed on for their entire working lives via payroll deductions, and now they’re being taxed again when they receive it?

2015 shows the couple doing no tax planning. Their ordinary and adjusted gross income is $85,200 after taxing the 31% of their Social Security benefits that isn’t counted toward income out of the equation. After their standard deductions and exemptions, their taxable income is $62,100 for a tax liability of $9,734.

2016 shows that same couple, with the same $100,000 of gross income, but with a little bit of pro-active tax planning. Here instead of taking $52,000 out of their 100% taxable IRA account, they only take $26,000 out, and pull another $26,000 from one of their FIVE COMPLETELY TAX FREE accounts that they had set up in advance with their Anthony Capital advisor. Income from these accounts don’t count towards Social Security taxes or Medicare Part B &D premium surcharges. They only pay $2,878 in taxes, saving them $6,856 a year.

Over a 30 year retirement life, saving $6,856/year in taxes with a little bit of planning grows to over $845,659 at 8%!!

You should get a 2nd Opinion review to make sure that you are claiming the correct amount of Social Security—the amount that will maximize your lifetime benefit. Also, you need to integrate your Social Security income with a comprehensive tax, investment, insurance, Medicare, Long Term Care, home equity, and legacy/estate plan. Request a 2nd opinion today, it could save you thousands!

Dave Anthony, CFP®,RMA®