Working past retirement? Know the feds’ rules

The rules surrounding your Social Security benefits can be confusing. And the topic of collecting benefits while you still are working can add to this confusion.

There are many reasons to work into retirement while drawing Social Security benefits. These could include the need for the extra income or perhaps a desire to keep active and engaged with others. Here are some important details to know if you’re working and collecting your Social Security benefits, or considering taking them.

WHEN TO CLAIM

You’re eligible to claim your Social Security benefits as early as age 62. The full retirement age (FRA) for people born before 1960 is 66; it rises to 67 for people born after 1960. Your Social Security benefit level maxes out at age 70.

Taking your benefit at age 62 results in a 25 percent lower payout than if you waited until your FRA, if it’s 66. It’s 30 percent lower if your FRA is 67. Claiming your benefit at age 70 results in an 8 percent annual increase in the benefit for every year you wait between your FRA, if it’s age 66.

There’s no one right answer here as to when to claim your Social Security benefits. Your income needs, life expectancy and other factors come into play. In addition, there are timing factors to consider for married couples about when each should claim.

INCREASING BENEFITS

People who work past age 60 and beyond, or after they file for benefits, often ask whether earnings increase Social Security benefit, said Mike Piper, CPA and author of “Social Security Made Simple.” “The answer is yes,” he said. “If your new earnings are included in your 35 highest wage-inflation-adjusted years, your benefit would go up.”

LOWER EARNINGS?

For people who still work but earn less money, which is common for semi-retirement, many wonder if that will lower their Social Security benefit, Piper said. “The answer is no” he said. “If a new year of earnings isn’t in your 35 highest, it simply won’t be included in the calculation.”

INCOME AND REDUCTIONS

If you work and collect Social Security benefits, it’s important to understand how your earned income can affect your Social Security payments. “Your earnings can cause a reduction in your Social Security benefits now, but you’ll get credit for the reduction later,” said Jim Blankenship, financial adviser and the author of “A Social Security Owner’s Manual.”

“For every $2 over $15,720 that you earn from a job or self-employment (according to 2016 figures), your Social Security benefit will be reduced by $1,” he said. “Withheld benefits are credited back to you once you reach FRA.”

This reduction applies to income earned from employment and self-employment. It does not apply to income from investments or other nonemployment sources. Once your reach your FRA, there are no reductions in your benefit because of earned income. At that point, you can earn as much as you’d like with no effect on your benefits.

TAXES ON INCOME

For people who continue to work after their retirement age, payroll taxes — such as income taxes, Medicare and Social Security — will all continue to be withheld from your pay. This remains the same regardless of your age and whether or not you are drawing a benefit from Social Security.

TAXES ON BENEFITS

Based upon your income, your Social Security benefits could be subject to federal taxes. Social Security uses an income measurement called “combined income” to determine how much of your benefit could be subject to taxes. Combined income is calculated as adjusted gross income plus nontaxable interest income — from municipal bonds, for example — plus half of your Social Security benefit.

No more than 85 percent of your benefit will be subject to taxes. Note that 13 states can tax your Social Security benefit, in addition to any federal tax liability. For those who are working or who are self-employed, this could certainly be a consideration.

BENEFIT DO-OVER

If you change your mind after you’ve claimed your Social Security benefits, you’re entitled to a once-per-lifetime “do-over” to withdraw your application. You might want to do this if your circumstances change after you initially file for benefits — for example, if you decided to return to work after retiring.

If you go this route, you can reapply for benefits at a later date at the benefit level in effect at that time for your age and earnings record.

CONTRIBUTING TO RETIREMENT PLANS

Taking Social Security benefits does not affect your ability to contribute to retirement plans, such as an IRA or a 401(k). Traditional IRA accounts do prohibit contributions after you reach age 70  1/2. If you are working at a company that offers a 401(k), you can continue to contribute after age 70  1/2.

DON’T FORGET MEDICARE

“People need to be aware that even if someone decides to wait, and accrue delayed credits with respect to Social Security benefits, the rules for Medicare eligibility remain unchanged,” said Jae Oh, financial planner and author of “Maximize Your Medicare.”

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This story was originally published July 30, 2016 at 8:45 PM with the headline "Working past retirement? Know the feds’ rules."