Does it Matter If You Earn Money After You Sign Up for Social Security Retirement Benefits?

Many people who collect Social Security retirement benefits continue to work. If you earn significant income in retirement, it can affect your Social Security retirement benefits in two ways. It can reduce the amount you receive in SS retirement benefits, and it can determine how much of your Social Security benefits will be subject to income taxes.

Earning Limits

If you start collecting Social Security retirement benefits before full retirement age, there are limits on how much you can earn before it affects your retirement benefit. The Social Security Administration considers 66 to be full retirement age for people born between the start of 1943 and the start of 1955. During early retirement, you can earn up to $15,120 per year without any effect on your benefits. If you earn more than that, your Social Security benefit will be reduced by $1 for every $2 you earn above the limit. In the year you turn 66, you can earn up to $40,080 with no effect on your benefits, but you will lose $1 in benefits for every $3 you earn above the limit. If you are 66 or older for the entire year, there is no limit on your earnings.

Benefits Cut

If you earn more than the allowed amount in one year, your Social Security benefit will be reduced the following year. Let's say that in 2013 you collect $600 a month in retirement benefits, you're between 62 and 65, and you earn $2,400 more than the $15,120 limit. Half of that amount, or $1,200, would be cut from your benefit. That means you would not receive any Social Security payments for the first two months of 2014. The same process would apply in the year you turned 66. If you earned $2,400 more than the $40,080 limit, you would see 33 percent, or $800, cut from your benefit. You would receive no $600 benefit in January of the following year, and a $200 reduction in your February benefit.

Tax Bite

The income you receive from other sources will affect how much of your Social Security retirement benefit is taxable. The taxable portion of your retirement benefit ranges from zero to a maximum of 85 percent, depending on your “combined” income. This figure is calculated by adding to your federal adjusted gross income any nontaxable interest and half of your annual Social Security benefit. Your federal AGI includes taxable distributions from 401(k) plans, individual retirement arrangements and other sources as well as earned income. No one pays tax on more than 85 percent of their Social Security benefit, regardless of income. Those who have no income other than Social Security generally won’t owe any income tax on their benefits.

Income Steps

For 2012, your Social Security retirement benefit won’t be taxed if your combined income for the year was less than $25,000 if you file singly, or $32,000 if you file jointly. You will pay tax on 1 percent to 50 percent of your benefit if your combined income is between $25,000 and $34,000 if single, or between $32,000 and $44,000 if filing jointly. If combined income exceeds $34,000 for singles and $44,000 for joint filers, the taxable portion of your benefit will be between 51 percent and 85 percent. The Internal Revenue Service provides a complex 19-step formula for figuring the taxable portion of your benefits. See Resource section for a dedicated calculator that does the math.