Social Security benefits can potentially make or break retirement for many older Americans. In fact, around 1 in 5 baby boomers say that Social Security is their sole source of retirement income, according to a 2020 survey from the Nationwide Retirement Institute.
If you plan to rely on your benefits in any capacity in retirement, it’s wise to ensure you’re receiving as much as possible. And there are a few unexpected ways you could lose your benefits without realizing it.
Your Social Security benefits may be subject to both state and federal income taxes in retirement. Whether or not you owe state taxes will depend on where you live, and the good news is that 38 states do not tax Social Security at all.
Federal taxes will depend on a figure called your “combined income,” which is your adjusted gross income plus half of your annual Social Security benefit amount. So, for instance, if you’re withdrawing $30,000 per year from your 401(k) and are earning $20,000 per year in benefits, your combined income is $40,000 per year.
If your combined income is higher than $25,000 per year (or $32,000 per year for married couples filing taxes jointly), you’ll owe federal taxes on a portion of your benefits.
2. Unpaid debts
In some cases, the Social Security Administration can withhold a portion of your benefits if you have certain types of unpaid debts.
These debts can include unpaid child support, alimony, or restitution. The Department of the Treasury can also garnish your benefits to cover unpaid tax debts, withholding up to 15% of your monthly checks until you repay your debt.
3. Delaying benefits too long
In general, waiting to file Social Security will result in a larger benefit amount. It is possible to delay too long, though, in which case you could miss out on money that you’re owed.
You can file for benefits at age 62 or any age thereafter. By delaying Social Security until age 70, you’ll receive the highest benefit amount. If you delay past age 70, however, it won’t result in larger checks.
If you’re still working at age 70, it’s best to begin claiming Social Security regardless of whether you’re ready to file or not. If you wait past that age to file, you’ll simply miss out on money you’re entitled to receive.
4. Earning too much
You can continue working even after you claim benefits, but if you haven’t yet reached your full retirement age (FRA), you could have a portion of your payments withheld.
How much of your benefits will be withheld depends on your wages and your age. If you won’t reach your FRA in 2022, your Social Security will be reduced by $1 for every $2 you earn over the limit of $19,560 per year. So, for instance, if you’re earning $25,000 per year at your job, that’s $5,440 over the limit, so your benefits will be reduced by $2,720 per year.
If you will reach your FRA this year, your earnings are subject to a different limit. In this case, your payments will be reduced by $1 for every $3 you earn over $51,960 per year.
Fortunately, these reductions are only temporary. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to account for the withholdings. But although you’re not technically losing money, if you were counting on that monthly income in retirement, you could be in for a surprise if you’re earning too much.
Making the most of Social Security
Social Security benefits are often a major source of income for retirees. By understanding as much as possible how the program works, you can squeeze every penny out of Social Security and enjoy a more financially comfortable retirement.
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