Here’s one to get your calculator or your hair out.
A growing number of retirees have left the sidelines and returned to work this year, but one thing that might surprise them is the impact any income, even from part-time work, can have on their security benefits. social.
I hear this all the time from retired family members, friends and readers.
About 1.5 million pensioners have not retired and re-entered the U.S. labor market over the past year, Nick Bunker, director of economic research at Indeed Hiring Lab, told Yahoo Money.
“That’s more than 3% of retired workers who have made the decision to return to work, a continuation of a trend that began in the spring of last year,” he said.
The impetus for many was soaring inflation and stock market volatility that rattled retirement accounts.
Unretiring is good news in my book. I’m a big proponent of working as long as possible to build financial security to support a longer, healthier life. And, of course, there are all the other good things that somehow work can provide like social networking, the psychological boost of feeling relevant and needed, and the mental engagement for the use before you lose it.
But the problem is that some of those former retirees who were forced out of the workforce due to layoff or who took early retirement packages in the first year or so of the pandemic decided to dip into their benefits. social security to earn a living. They were eligible if they were 62 or older and thought it made sense to turn it on. I understand.
But this is where things get complicated. New paychecks could trigger Social Security’s retirement income test; a formula that withholds part of the benefits if your wage income exceeds a set level.
“Social Security earnings testing is problematic even without the pandemic, but it’s even more pronounced now,” Martha Shedden, president of the National Association of Registered Social Security Analysts (NARSSA), which has trained more than 3,000 counselors on how to help their customers make optimal social security decisions, Yahoo Money told . “There are quite a few people who are dealing with this because of what has happened in the last three years.”
Here’s how it works. The earnings test only applies to people who collect Social Security between 62, the earliest age of eligibility, and their full retirement age – between 66 and 67, depending on the year of your birth.
On the face of it, you are allowed to claim Social Security retirement benefits while working. And the services withheld are not lost — Social Security recalculates the monthly benefits when you reach full retirement age to recredit the withheld benefits.
But retirees caught in this situation are often confused.
For example, it may be months between the time the wage income is reported to the Social Security Administration and the time Social Security begins to hold your check. If you are a contract worker, this amount may not be revealed until you file your taxes. As a result, you are overpaid according to their calculations and you must repay benefits.
“It’s not a good situation,” Shedden said.
In general, the way the earnings test works is if you are between 62 and your full retirement age and you are earning more than $19,600 this year (the limit is adjusted each year) and you receive social security, the administration will deduct $1 for each $2 over this limit.
For those reaching full retirement age in 2022, the annual amount exempted is $51,960. This higher exempt amount only applies to income earned in the months preceding the month in which you reach retirement age.
“It’s a hot topic,” Justin Smith, a certified paid financial planner at Savant Wealth Management in Phoenix, Arizona, told Yahoo Money. “Many of my clients ask me questions about social security, and how that plays into their desire to continue working longer, or to start a business or consulting practice. They blur the lines, which makes the timing of take Social Security much more complex.
The good news is that the earnings test disappears at full retirement age. But it might be wise to curb the taking of benefits up to age 70.
“If your world has changed and you’re back at work and you no longer need that Social Security income, you can voluntarily put it on hold and hit the pause button between retirement age at full and 70,” Smith said. “You earn these deferred retirement credits, which is an annual increase of about 8% per year.” The increase in benefits stops when you reach age 70.
For non-retirees who have reached full retirement age, it’s a whole different set of circumstances. You basically have two options. The first option is that you can withdraw your claim for benefits within the first 12 months.
“It’s a full undo, and you can only do it once,” Smith said. “That means you have to repay the benefits you received. I don’t see it often because people generally don’t like to repay these benefits. »
Of course, if you know for sure that you’re going to be below that threshold, then you could have the best of both worlds where you get a social security check and a paycheck with no income consequences.
Either way, your best decision is to contact your local Social Security office once you have an idea of your income and decide whether you want to suspend your benefit or withdraw your claim.
A parting thought that I would be remiss to ignore here.
Even if your earnings are below the earnings test threshold, your extra income could trigger social security contributions.
If you file a federal tax return as an “individual” and your combined income is between $25,000 and $34,000, you may have to pay income tax up to 50% of your benefits and if it is over $34,000, up to 85% of your benefits may be taxable.
If you file a joint return and you and your spouse have combined income between $32,000 and $44,000, you may have to pay income tax up to 50% of your benefits and more than $44,000, up to 85% of your benefits may be taxable.
And so on.
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon
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