Social Security benefits and The Earnings Test

Social Security benefits and The Earnings Test

It’s only applicable before full retirement age:

The earnings test reveals the amount of earnings a Social Security recipient can have before benefits are withheld. In 2012, the exempt amount is $14,640. For every $2 earned over $14,640, $1 in benefits is withheld. This means that for a person receiving, say, $1,800 per month in benefits, annual earnings of more than $57,840 would cause all benefits to be withheld. ($1,800 × 12 = $21,600 × 2 = $43,200 + $14,640 = $57,840.)

Here’s the most important thing to know about the earnings test: The easiest way to get around it is to wait until full retirement age or later to apply for benefits. The old way of managing earnings for the earnings test was to apply at 62 and work to keep earnings under $14,640. The new way is to earn as much as possible for as long as possible, waiting until age 66 or 70 to apply for benefits. The extra earnings and higher Social Security income will provide much more financial security for baby boomers throughout retirement.

The earnings test is higher in the year the client turns full retirement age:

A person who applied for early benefits may earn more in the year he turns full retirement age. In 2012 the higher amount is $38,880, or $3,240 per month. One dollar in benefits will be withheld for every $3 earned over the $3,240. Let’s say Steve, who applied for early reduced benefits, will turn 66 on June 15, 2012.This year, starting in January, he may earn up to $3,240 per month before any benefits will be withheld. Starting June 1, the month he turns 66, there will be no earnings test at all; he may earn any amount and no benefits will be withheld.

All earnings count except…

All wages and self-employment income count for the earnings test. Wages are W-2 earnings. Self-employment income is Schedule C net income. In both cases, gross earnings are counted before contributions to retirement plans. At the beginning of each year, clients will be asked to estimate their earnings for the year. Benefit withholdings will be based on this estimate and then adjusted the following year after earnings are reported. SSA encourages people to give high earnings estimates (http://policy.ssa.gov/poms.nsf/lnx/0302501105) to avoid overpayments which will have to be paid back the following year. There is a provision for “special wage payments” such as vacation pay, sick pay, bonuses, etc. Whether or not these will be considered earnings for the earnings test will depend on when they are received and, in certain cases, the type of payments they are. See RS 02505.025 Special Wage Payment (SWP) (http://policy.ssa.gov/poms.nsf/lnx/0302505025). Certain employer payments may be excluded from the earnings test. See RS 01402.000 Wage Exclusions (http://policy.ssa.gov/poms.nsf/lnx/0301402000) for more on this. Other forms of income, such as pension and investment income, do not count for the earnings test.

Benefit is adjusted at full retirement age:

When benefits are withheld due to the earnings test, they are adjusted at full retirement age to credit back the actuarial reduction for those months in which benefits were withheld. The “ARF” (http://policy.ssa.gov/poms.nsf/lnx/0300615480) as it is called, is done automatically. Example: David’s PIA is $2,000. He starts early benefits at age 62 and receives $1,500 per month, a reduction of 25%. He works and earns $32,640 per year, which causes $9,000, or six months worth of benefits to be withheld ($32,640 – $14,640 = $18,000 ÷ 2 = $9,000 ÷ $1,500 = 6). When David turns 66, half of the 25% actuarial reduction, or $250, will be added to his benefit, making it as if he had originally applied for Social Security at age 63.5.

Benefit is recomputed annually to include additional earnings:

SSA continues to update each person’s earnings record as additional earnings are reported. If the additional earnings will result in an increase, the benefit will be recomputed (http://www.ssa.gov/retire2/whileworking3.htm) and increased. Otherwise the benefit will stay the same. Sometimes people wonder if their Social Security benefit will be adverselyaffected if they work part time in retirement. The answer is no; the adjustment will only be made if it results in anincrease. Here’s more than you ever wanted to know about:

How benefits are calculated (https://secure.ssa.gov/apps10/poms.nsf/subchapterlist!openview&restricttocategory=03006)

The annual earnings test (https://secure.ssa.gov/apps10/poms.nsf/subchapterlist!openview&restricttocategory=03025)

The definition of wages (http://www.socialsecurity.gov/OP_Home/ssact/title02/0209.htm)

More on the earnings test (http://www.socialsecuritybenefitshandbook.com/page12.html)

How you can’t beat the earnings test (http://www.aarp.org/work/social-security/info-05-2011/social-security-earnings-test.html)

Examples: When you work and get Social Security at the same time (http://www.ssa.gov/retire2/whileworking2.htm)

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’

________________

For further information, visit our website or call us at 480-513-1830

 

Social Security File-and-Suspend

The file-and-suspend strategy is one of those spousal strategies that can give a couple substantially more dollars in Social Security benefits that they otherwise might not have known to claim.

It’s a relatively new strategy, ushered in by the Senior Citizens’ Freedom to Work Act of 2000, which allows a person who is over full retirement age (FRA) to voluntarily suspend his or her benefit.

The file-and-suspend strategy is not to be confused with the claim-now-claim-more-later strategy. File-and-suspend is used when a husband or wife wants to delay their own benefit to age 70, but wants their spouse to start his/her spousal-benefit before then. Their spouse can’t start his/her spousal-benefit until the file-and-suspend spouse files for their own benefit, so he/she files and then immediately suspends in order for the other spouse to get their spousal-benefit and for the file-and-suspend spouse to earn delayed retirement credits (DRC). In contrast, claim-now-claim-more-later strategy is used when a high-earning spouse, say the husband, wants to receive a spousal-benefit based on his wife’s record. In this case he doesn’t “file” (which would imply filing for his own benefit). Rather, he restricts his application to his spousal-benefit and delays filing for his own benefit.

Savvy Social Security Reminder

“File and suspend” is what the higher-earning spouse does when   the lower-earning  spouse will be claiming the spousal benefit.“Filing a   restricted application” is what the higher-earning spouse   does when that spouse will be claiming the spousal benefit.

Make sure you understand what you are trying to accomplish and are able to describe this to the SSA worker. It helps to use SSA lingo: “voluntary suspension” for file-and-suspend, and “restricting the scope of the application” for claim-now-claim-more-later. But even more important is for you to really understand it and be able to say in plain words what you want.

File-and-suspend: The ideal way to do this is for both the husband and wife to visit their Social Security office together. The husband says, “I want my wife to start her spousal-benefit now, but I don’t want to start my own benefit yet. I want my own benefit to earn delayed retirement credits (DRC) to age 70. I’d like to file and suspend so my wife can start her spousal-benefit, but I want to make sure my own benefit doesn’t start now”.

Claim-now-claim-more-later: If the lower-earning spouse is already receiving benefits when the higher-earning spouse turns full retirement age (FRA), the higher-earning spouse can go alone to the SSA office and bring the lower-earning spouse’s Social Security number. If the lower-earning spouse will be applying for their benefit at the same time, they can go together. Once the lower-earning spouse has applied, and assuming the higher-earning spouse is past FRA and eligible for a spousal-benefit, he/she says: “I want to restrict my application to my spousal-benefit. I do not want to start my own benefit at this time. I want my own benefit to earn delayed retirement credits (DRC) to age 70.”

After the couple has made their respective applications, they should carefully review the letters they receive from SSA. These letters are very clear about the type of application the couple has made and will also give the benefit amount as well as the Medicare premiums that will be deducted from their checks (assuming they applied for Parts B and D). If there are any mistakes, they should call the number noted in the letter and get the situation resolved. It is especially important for the higher earner not to start receiving a benefit because that will stop the accumulation of delayed retirement credits (DRC).

(Source: Elaine Floyd, CFP,® director of retirement and life planning for Horsesmouth and author of the advisor training program ‘Savvy Social Security Planning for Boomers.’

________________

For further information, visit our website or call us at 1-800-567-3115