The Social Security system allows you to work while you are receiving retirement or survivor benefits. But, if you are below full retirement age, which is 66 as of 2012, there are limits on how much income you can receive from other sources without a reduction in your Social Security benefits. Some income is not counted toward the limits.
What Income Counts
Social Security counts income earned from working. If you work for an employer, your monetary compensation for work you performed counts toward your earnings limit. If you are self-employed, Social Security counts your net earnings after operating expenses. When you work for someone else, your wages count when earned, not when you receive them from the employer. If you are self-employed, your income counts when it is paid to you rather than when you earned it.
Some Not Counted
If you make contributions to an employee retirement plan from your wages, Social Security doesn’t count that money toward your income limit unless the employer includes it in the gross wages reported in Box 1 on your Form W-2. Social Security also doesn’t count unearned income from sources such as unemployment compensation, other government benefits, investments, capital gains, interest, annuities, IRA distributions, pensions or annuities.
If you are receiving benefits as of 2012 and are younger than 66, your benefits will be reduced by $1 for each $2 you earn above $14,640. In the year you turn 66, you will lose $1 of benefits for each $3 you earn above $38,880. For the year following the year you turned 66 and for all years thereafter, you will get your full Social Security benefit regardless of how much you earn. The rule is different in the year you retire. Money earned prior to the month you retire doesn’t count. For the months between retirement and the end of the year, you are allowed to earn $1,220 monthly as of 2012.
If you earn more than the income limits in any year, the excess will be deducted from your benefits starting in January of the following year. For example, if you were age 64 with a retirement benefit of $1,000 monthly, and you earned $4,000 above the $14,640 income limit in 2012, you would be penalized $2,000. The penalty would be applied against your $1,000 benefit payments for January and February of 2013, meaning you would receive no benefit payments for those months. Your benefit payments would resume in March.
Money Comes Back
If you lose Social Security benefits because you earned too much, the money isn’t gone forever. The lost benefits will be returned when you reach age 66. The money will be repaid to you in equal monthly installments spread over a span of 15 years.