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How Social Security Cuts Your Benefits If You're Still Working

And if you sign up for Social Security before full retirement age while staying on the job, your benefits could be doubly reduced.

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If I sign up for Social Security at age 62 but am still working, will that affect my benefits?

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Yes. If you sign up for benefits before your full retirement age (age 66 for workers born in 1943 through 1954), your benefits will be reduced by as much as 25% for claiming early -- and reduced further if you earn more than a certain amount of money from a job or self-employment. (Investment earnings, pension benefits or withdrawals from an IRA or 401(k) don’t count; pretax contributions to a 401(k) or other retirement plan do count if the amount is included in your gross wages.)

For 2015 and 2016, you’ll lose $1 from your benefits for each $2 you earn above $15,720. Say, for example, you turn 62 in January 2016 and plan to take Social Security benefits. If you were to fully retire, you would receive $600 per month ($7,200 for the year). You know, however, that you will be working and earning $20,800 (which is $5,080 above the $15,720 limit). In that case, you should let Social Security know about the estimated extra income when you apply for benefits. Social Security will then withhold $2,540 of your Social Security benefits ($1 for every $2 earned over the limit).

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Rather than withholding a portion of your benefits each month, Social Security will withhold all benefit payments from January 2016 through May 2016. (Because benefits will be withheld for the full month of May, the total amount withheld will, in this example, be $3,000 rather than $2,540.) Beginning in June 2016, you will receive your $600 benefit and continue to receive that much every month for the rest of the year. In 2017, you will receive the additional $460 that was withheld in May 2016. For more examples, see Social Security’s How We Deduct Earnings From Benefits.

A different limit applies in the year you reach full retirement age. In that year, you’ll lose $1 for every $3 in earnings over $41,880 until the month you reach full retirement age. At that point, there’s no earnings test; you can keep all of your benefits, no matter how much you earn.

What happens if you are subject to the earnings test and you make more or less than you estimated? When you file your tax return, the IRS will let the Social Security Administration know how much wage and self-employment earnings you report. That figure will be compared with your estimate, and the government will reconcile the books by either sending you a check -- if your estimate of earnings was too high and the earnings test withheld too much of your benefits -- or requiring you to pay the balance.

If you unexpectedly return to work and anticipate exceeding the earnings test, let the SSA know of the change in circumstances as soon as possible so your benefits can be withheld. If the tax return you file shows earnings that should have triggered reduced benefits, you'll be asked to pay back the excess in a lump sum or see future benefits reduced.

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Even though the earnings test affects your benefits, the money isn’t lost forever. If your retirement benefits are withheld for several months because of your earnings, then your monthly benefit will be recalculated at your full retirement age and increased to make up for the months when your benefits were withheld because of the earnings test.

For more information, see the Social Security Administration’s How Work Affects Your Benefits.

See Also: States That Don't Tax Social Security Benefits

Got a question? Ask Kim at askkim@kiplinger.com.