Under the Social Security Retirement Earnings Test (RET), the monthly benefit of a Social Security beneficiary who is below full retirement age (FRA) is reduced if he or she has earnings that exceed an annual threshold.
Much has been written that suggests that this earnings test results in penalties or lost benefits.
This is not entirely true, because if some of a recipient’s retirement benefits are withheld because of earnings, the recipient’s benefits will be increased starting at his or her full retirement age to take into account those months in which benefits were withheld.
When a recipient is under his full retirement age, $1 will be held back from his benefit check for each $2 of earnings in excess of the specified limits of $18,240 (in 2020).
This will change the year that the recipient reaches his full retirement age. That year, the recipient will have $1 held back from his benefit check for each $3 of earnings in excess of $48,600 (in 2020).
This means that from the month of January until the month before the recipient attains full retirement age, the recipient is allowed to earn up to $48,600 (in 2020), and still receive his or her full Social Security retirement check.
The $48,600 (in 2020) applies if the recipient reaches full retirement age on or before the last day of the taxable year.
The $18,240 (in 2020) applies if the recipient does not reach full retirement age on or before the last day of the taxable year.
After the month during which the recipient reaches his or her full retirement age, there is no longer any earnings limitation imposed.
This means that a person can work beyond age 66 (for those born between 1943 and 1954), and regardless of the amount of the recipient’s earnings, he will receive the full Social Security retirement benefit.
It is only earned income from wages and net income from self-employment that counts towards the specific earnings limit.
Any unearned income from sources such as interest, dividends, distributions from IRAs, 401(k)s and other retirement plans, Roth IRAs, annuities or cash value loans from life insurance does not count towards the specified limits.
Income earned by one spouse may or may not be included in the earnings test of the other spouse, depending on the circumstances.
For example, an older spouse might be retired and receiving Social Security based on his own work and earnings record, while the younger spouse continues employment, and receives no Social Security benefit.
In this case, even though they file a joint return, the younger spouse’s earnings would not be included in the older spouse’s earnings test.
If, however, a retired spouse was collecting benefits, not based on her own work and earnings record but as a spouse, then her working husband’s earnings would be included in her earnings test.
Few things will be more important than your future retirement. And the way time flies, it will happen before you know it. We can help you plan for the inevitable.