Advertisement
retirement

Passing the Social Security Benefits Earnings Test

Bone up on strategies that will get you the maximum Social Security benefits you've earned.

A big reason experts advise waiting until at least full retirement age to claim Social Security: You get to skip the benefits earnings test, which hits early claimers who are still working. But there are actually two earnings tests–and the second test can help early retirees leaving work midyear avoid the trap.

Advertisement - Article continues below

The Social Security Administration always applies the annual earnings test first. Based on that test, the agency temporarily withholds $1 of a worker's benefits for every $2 earned over $17,040 in 2018. In a year the worker hits full retirement age, the test is more generous–the worker forfeits $1 in benefits for every $3 in 2018 earnings above $45,360.

In the month a worker hits full retirement age–poof!–the earnings test goes away. The worker can earn whatever he or she likes, and the monthly benefit amount will be adjusted upward to take into account all benefits forfeited in the past (more on recouping lost benefits below).

But if you're tripped up by the annual test, you still have a shot at your full benefit. The agency will apply a monthly earnings test and set your payments according to whichever test is better for you. "It helps people who retire in the middle of the year not to be penalized," says Jim Blair, a former Social Security district manager and a partner at Premier Social Security Consulting, in Sharonville, Ohio.

Advertisement
Advertisement - Article continues below
Advertisement - Article continues below

The monthly test can be used for only one year, usually the first year of retirement. And it comes into play generally for midyear retirees who have already earned more than the annual limit. Those who pass the monthly earnings test can receive 100% of their benefits for any whole month the agency considers them retired, regardless of total annual earnings.

Taking the Monthly Social Security Earnings Test

Here's how the monthly earnings test works: If you are under full retirement age for all of 2018, you are considered retired in any month you earn $1,420 or less. If you reach full retirement age in 2018, you are considered retired in any month you earn $3,780 or less.

Say a beneficiary turns 62 in June. He wants to start benefits in July after working through the end of June and making $80,000 in 2018. On an annual basis, he'd get no benefit. But in July through December, if he earns $1,420 or less each month, the monthly earnings test would open the door to full benefits.

Advertisement - Article continues below

"You have to be careful if you go up to $1,421–then the agency would add the $80,000," Blair says. In that case, you would lose a check for that month, but not for other months when benefits are below the monthly threshold. "A sneaky five-Friday payday month might end up passing the monthly earnings amount," he says.

When retiring in the year you reach full retirement age, the earnings test only applies in the months prior to the month of your birthday. The higher threshold of $3,780 would apply if the monthly test is used in 2018. The earnings tests count only earned income from a job or self-employment; investment income, for example, and retirement-plan payouts are ignored.

Advertisement
Advertisement - Article continues below

If you work while claiming early benefits, call Social Security with your estimated earnings so you don't get more benefits than you are due. ™Eventually, earnings are posted to your record and they'll see they overpaid," Blair says. The agency will want the money back–and will withhold benefit checks until the overpayment is cleared.

Recouping Lost Benefits

The burning question when a person loses Social Security benefits to the earnings test: When do I get my money back?

Unfortunately, you won’t get all your temporarily forfeited benefits back in a lump sum at full retirement age. Instead, your monthly benefit amount is adjusted upward in the month you hit full retirement age to account for forfeited benefits. The disappearing benefits essentially reduce the amount of time you were considered to have claimed benefits early.

Say you took benefits at age 62 instead of waiting to your full retirement age of 66, giving your benefits a haircut of 25%. If you forfeited 12 months’ worth of benefits to the earnings test, at your full retirement age, you’ll be treated as if you claimed benefits three years early, instead of four. Your lifetime benefits reduction will get slashed from 25% to about 20%. That puts more money in your check every month, and if you live long enough, you’ll recoup all the benefits the earnings test temporarily took away.

Advertisement

Most Popular

What Are the Income Tax Brackets for 2020 vs. 2019?
tax brackets

What Are the Income Tax Brackets for 2020 vs. 2019?

The IRS unveiled the 2020 tax brackets, and it's never too early to start planning to minimize your future tax bill.
June 20, 2020
HSAs Get Even Better
Financial Planning

HSAs Get Even Better

Workers have more options with flexible spending accounts, too.
July 2, 2020
17 States That Will Gain or Lose Electoral-College Votes After the 2020 Census
Politics

17 States That Will Gain or Lose Electoral-College Votes After the 2020 Census

Every 10 years, the 435 seats in the House of Representatives are reassigned based on the results of the U.S.
July 2, 2020

Recommended

14 Social Security Tasks You Can Do Online
retirement

14 Social Security Tasks You Can Do Online

Why visit a government office to get your Social Security business done? You can do much of that online.
June 26, 2020
Where Should You Retire?
retirement planning

Where Should You Retire?

This week, our Your Money's Worth podcast host Ryan Ermey interviews co-host Sandy Block about her recent story about the best retirement destinations…
July 7, 2020
How to Get an Extension for Filing Your Tax Return
tax deadline

How to Get an Extension for Filing Your Tax Return

If you can't wrap up your tax return by the July 15 deadline, it's easy to buy yourself more time.
July 7, 2020
Tax Tips for Last-Minute Filing
tax deadline

Tax Tips for Last-Minute Filing

As you rush to meet the July 15 tax filing deadline, here are some pointers to bring your stress level down.
July 7, 2020