When filing for Social Security before your full retirement age, it is imperative that you understand how the income limit works. Don’t miss this! You’ll receive an overpayment notice if you fail to adhere to these rules, and it may result in your benefits being terminated.
This is one of the topics that I’m asked about all the time. When it comes up, I’ve noticed that most people have the same questions.
- Why do we have an income limit?
- How much can I earn?
- What happens to withheld benefits?
- Is the income limit based on single or joint income?
- What if I retire during the year (after exceeding the annual limit)?
- What income counts towards the Social Security income limit?
Today, I’ll give you the answer to each of these questions. When you finish reading this, you’ll no longer find this topic to be a mystifying no-man’s land waiting to trip you up.
Before we get the top six questions on the Social Security income limit, you should be aware of two things:
- We are talking about Social Security income limits for retirement benefits, not disability or SSI.
- The income limit only applies before your full retirement age. That age is specific to your date of birth, but for everyone born in 1960 or later, the full retirement age is 67. Once you reach that age, the income limit does not apply.
Let’s dive into these questions…
Why do we even have an income limit?
There are a lot of people who think the income limit is unnecessary and should be eliminated. I tend to agree. There’s not a good reason to have this in place today.
There’s a reduction in benefits that serves as a deterrent to filing early. If someone wants to make the decision to file early and accept a lower payment, I say it should be up to the individual. But I also understand why this was put into place.
The rationale behind the entire program of Social Security was to create a safety net. The original intent of the Social security program was NOT to supplement retirement income, but to keep the elderly out of poverty.
The truth is that today’s income limit is actually pretty generous compared to where the Social Security income limit began. The original Social Security Act that President Roosevelt sent to Congress featured a very restrictive earnings limit. It said, “No person shall receive such old-age annuity unless . . . He is not employed by another in a gainful occupation.” That meant that if you had even a single dollar in wages from a job, you could not collect a Social Security benefit at all!
Thankfully that system has evolved to the system we have in place today that allows for individuals to have some earnings from work while they are receiving a Social Security benefit.
How much can I earn (and stay under the limit)?
If you decide to file for Social Security and continue working, you need to keep up with the annual income limit. This limit generally changes every year so the information for this year may not be valid in future years.
In 2022, If you make more than $19,560, the Social Security Administration will withhold $1 in benefits for every $2 in income that exceeds that amount.
The one exception is during the calendar year you attain full retirement age. During that period, the earnings limit nearly triples to $51,960 and the withholding amount is not as steep. In that band, for every $3 you earn over the income limit, Social Security will withhold $1 in benefits.
What happens to withheld benefits?
If the income limit catches you, and your benefits are stopped, don’t despair. You aren’t missing payments that you’ll never get back. Your benefit amount will be recalculated at your full retirement age to reflect the months that benefits were withheld.
For example, assume your full retirement age is 67 and you file at 62. There are 60 reduction months applied to your benefit. If at some point you start working part time, and this results in 5 months of benefits being withheld, your benefit will be recalculated at full retirement age as if you had 55 reduction months instead of 60.
Is the income limit based on single or joint income?
The average married couple is used to counting all of their household income together in one big pot. When you file jointly with your spouse, you include both spouses’ earnings when determining how much tax you owe.
So it makes sense to wonder what happens if a spouse earns more than the Social Security income limit — does that affect your benefits if you want to file early? The answer is yes…and no. It depends, but thankfully the answer isn’t that complicated to figure out.
In short, the answer is no…it doesn’t count. The income test is an individual test. If a husband and wife are each receiving Social Security benefits from work they individually performed, their spouse’s excess earnings cannot affect them. For example, if your wife goes back to work it may affect her benefit payment, but it won’t affect yours.
But here’s where this can get a little tricky: Excess earnings, those earnings that are over the limit, will affect your benefits and any benefits paid from your benefits. So if anyone is collecting benefits from your work, and you have excess earnings, their benefit will also be affected.
For example, if your wife is collecting a spousal benefit and you have excess earnings, both your benefit and her spousal benefit will be suspended. The exception to this is for an ex-spouse. An ex-spouse’s excess earnings cannot affect your Social Security benefits if you have been divorced for at least two years.
What if I retire during the year (after exceeding the annual income limit)?
The income limit is almost always based on your annual earnings, but in certain circumstances, it could be your monthly earnings that are counted.
The monthly income limit was created because the Social Security Administration recognized that some people who retire mid-year have already earned more than their yearly earnings limit.
For these people the SSA recognized that it wasn’t fair to make them wait until the next year to file for benefits if they are truly retired. So there are some cases in which it’s your monthly earnings that are counted.
For example, say you earned $100,000 from January until July, and then retired in the summer. If you then filed for benefits, the monthly income limit would make you eligible to receive those benefits even though you are clearly in excess of the annual test.
To make the alternative monthly limit as easy as possible to understand, we can address the differences by answering important questions. First, How do you know when the SSA will monthly limit applied versus using the annual limit, and then how much is the monthly limit?
Let’s walk through each of these separate questions one by one.
First, how do you know if you are covered by the monthly income limit, or the annual limit?
The Social Security Administration says that the “Monthly Earnings Test (MET) applies when an entitled beneficiary has one or more non-service months (NSM) in a grace year.” Here’s what that means: In the first calendar year you receive Social Security benefits and have a month of earnings that is less than the monthly earnings limit amount, the income limit turns into a monthly income limit test. It will run for the remainder of that calendar year. After that, it’s back to the annual test.
The second question is, how much is the monthly income limit?
Your monthly income limit amount is simply the annual limit divided by 12.
If you are subject to the monthly limit in 2022, then you would take $19,560 and divide by 12.That gives you your maximum monthly earnings allowed. For this year, that’s $1,630. The exception is if you attain full retirement age this year. In that case, your monthly income limit would be $4,330.
What income counts towards the Social Security income limit?
Thankfully, the Social Security Administration makes it easy to understand what income meets the definition of earnings for purposes of the income limit.
First, let’s look at the income that does not count toward the income limit. This includes:
- Pension payments
- Most annuity payments
- IRA and retirement account distributions
- Interest income
- Capital gains
With the current law, you are eligible to receive an unlimited amount of income from these sources while still receiving your full Social Security benefit.
Ninety-five percent of all types of income can be captured in this short, concise list. However, there are a number of other types of income that may cause confusion.
You might have back pay, bonuses, vacation pay, deferred comp, fiduciary fees, renewal commissions — the list goes on. Unfortunately, we can’t go through each of these in detail here because even the Social security administration’s page lists 88 different types of income! Adding to the confusion, certain types of income aren’t counted for employees, but are for those who are self-employed.
How to continue learning about the Social Security income limit
To continue learning about this topic, I’d suggest you download my Social Security Cheat Sheet. This has the annual income limit amounts and a LOT of other information on it and once you download it, as long as you stay on my email list, I’ll send you the latest version every year as soon as its updated. Get your FREE copy here.
You should also consider joining the nearly 400,000 subscribers on my YouTube channel! This is where I break down the complex rules and help you figure out how to use them to your advantage.