2 Ways Working During Retirement Could Cost You Big-Time Social Security Benefits

If you are planning to work during your retirement while collecting Social Security, you may be faced with an unpleasant surprise. Depending on your age and how much you earn, it’s possible your paychecks could cause you to lose some Social Security income — either temporarily or permanently.

You don’t want to find out as a retiree that your combined income from Social Security and your job is a lot smaller than expected, so be sure you’re aware of these two possible ways earning money could affect the retirement benefits you bring home.

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1. Working could make Social Security benefits taxable

One of the biggest issues, when you work while collecting Social Security, is that you could end up earning so much that you start to get hit with taxes on Social Security income.

Your benefits are not taxable on a federal level as long as your provisional income doesn’t exceed a certain threshold. Provisional income, or countable income, is half your Social Security benefits plus all taxable income and some non-taxable income. If you earn money from a job, it will be taxable income. That means it will count in this calculation and could render your Social Security benefits subject to tax.

The income at which the IRS begins taking a cut of your benefits is not very high, so this could be a huge issue even for middle-income retirees earning a paycheck to supplement Social Security. You could be taxed on up to 50% of your benefits with a provisional income between $25,000 and $34,000 for single tax filers or between $32,000 and $44,000 for married joint filers. And once countable income goes above these thresholds, you could be taxed on up to 85% of benefits.

As if this isn’t enough, 12 states also tax Social Security but usually exempt lower earners. So if working puts you above your state’s threshold at which benefits become taxable, you could lose even more of your Social Security checks due to your job.

2. You could forfeit some of your benefits if you haven’t hit your full retirement age

There’s another possible reason working could cause you to lose some of your Social Security income. Under the rules of the program, you forfeit benefits if you earn too much before hitting your full retirement age (which is between 66 and four months and 67 for those who are 66 or younger in 2022).

If you are collecting benefits and won’t hit FRA at all over the course of the year, you will find yourself giving up $1 in Social Security for every $2 earned above $19,560. This is the 2022 limit, and it can change annually due to inflation.

If you hit FRA at some time during the year, you still could lose Social Security benefits if you work before it. You’ll lose $1 for every $3 earned above $51,960. But the good news is, after reaching full retirement age, you can work as much as you want and not forfeit benefits.

Unlike when your job causes your benefits to become taxable, the hit to your Social Security from earning above these thresholds is temporary. At full retirement age, your benefits are recalculated, and you’re given credit for the income you didn’t get. This means your future monthly payment amounts go up. But it takes time to break even and make up all the missed benefits.

Before you work, you should be aware of these two possible consequences for your Social Security checks. You could find yourself with less money than you expect — and that could affect your financial security as a retiree.

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