Social Security tips for working retirees

If you work in retirement, know the impact to your Social Security and taxes.

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Key takeaways

  • There are several ways to help reduce taxes and maximize benefits.
  • "Do-overs" are allowed within 12 months of commencing benefit payments.
  • Earnings test may apply if you claim early.

Do you plan to work for income after you retire? If so, and if you've begun taking Social Security benefits, you need to be aware of how your Social Security income may be taxed—and the earned income thresholds that determine the level of your taxes and any reductions in benefits.

In an AARP survey, 37% of people indicated that they plan to work either full time or part time during retirement.1 Why? In addition to the financial benefits, many older workers anticipate that working after retirement can add valuable structure to their day and provide the mental stimulation that comes from interacting with co-workers, clients, and other work associates.

Among those who plan to work in retirement out of financial necessity, a survey by the Transamerica Center for Retirement Studies found 43% expected to use the money to cover essential expenses, 37% to pay for health care, and 20% to save more for retirement.2

Whatever your reason for considering working in retirement, it’s a good idea to know how doing so will affect your Social Security benefits and your tax bill. Here are the facts, plus some strategies to consider.

Temporary benefit reductions for earned income

The earliest age at which you are eligible to claim Social Security benefits is 62. If you claim your benefits and continue to work, there is an earnings test until you reach your full retirement age (FRA), 66–67, depending on the year you were born. If you have earned income in excess of $18,240 in 2020, your benefits will be reduced by $1 for every $2 of earned income over the $18,240 limit.

Note that "earned" income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they are all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of "unearned" income.

If you reach your FRA during 2020, the limit for earned income rises to $48,600 and the benefits reduction is $1 for every $3 earned over the limit until the month you reach your FRA. After that, your earned income is not subject to an earnings test or benefit reductions.

For example, if your monthly benefit was $2,000, here is how much your benefit would be reduced for various levels of earned income at certain ages:

Monthly benefit reduction by age and earned income levels

Earned income Younger than FRA Year attaining FRA FRA or older
$30,000 $515 $0 $0
$40,000 $932 $0 $0
$50,000 $1,348 $86 $0
Analysis based on $2,000 in assumed monthly Social Security benefits. For illustrative purposes only.

Once you reach your FRA, the Social Security Administration (SSA) will look at the number of months of Social Security benefits that you were reduced due to the earnings test. They add that number of months to the age when you started Social Security, resulting in a later (older) retirement age for their records, and a resulting higher benefit going forward. For example, if you retired at 62 and your FRA was 66, and the earnings test reduced your Social Security during those 4 years by 50%, then at FRA the SSA would add 50% of those 4 years to your original retirement age, resulting in a new retirement age for their records of 64, and a corresponding higher benefit going forward.3

Income tax implications

Social Security benefits are subject to federal income taxes above certain levels of "combined income" (also known as provisional income or modified adjusted gross income). Combined income generally consists, among other things, of your adjusted gross income (AGI), nontaxable interest, and one-half of your Social Security benefits. For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See Income Taxes And Your Social Security Benefit for more information.)

For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.

For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.

Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.

Additionally, 13 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if this affects you.4

Social Security and Medicare taxes

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. (Income from investments, pension benefits, and money withdrawn from an IRA or 401(k) are excluded.) There is no age limit on these withholdings, nor is there any exemption for any sort of Social Security benefits status.

The good news is that these earnings can also count toward the calculation of your benefits: Social Security monitors your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

What if you are making much less in retirement than before? Could it hurt your benefits? The answer is no, because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.

The big decision: When to claim Social Security

When to claim Social Security benefits will be one of the most important decisions that you make regarding your retirement, along with how to take income from your various retirement accounts and how you will fund your health care needs in retirement. The following chart shows the difference for someone turning 62 in 2019. Let's assume their Social Security benefit at full retirement age of 66 plus 6 months is $2,000. The first set of numbers on the chart shows the benefit amounts they would receive by claiming at various ages.

Tip: You should also be aware of a special rule for the first year of retirement. This rule allows you to get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings. This helps people who retire in midyear or later who have already earned more than the annual earnings limit.

Going back to work—meet James

In our hypothetical example, James, age 64, retired at 62 from a plumbing supply company in the Chicago area, and claimed Social Security benefits as soon as he was eligible, at 62. James misses not having some structure in his day. He loves home improvement and helping people, so he found a job at a big box retailer. His wife, Arlene, age 61, is still working part time. Both have FRAs of age 66.

3 Social Security options for James to consider

  1. Social Security do-overs are allowed within 12 months of commencing benefit payments.6 In James’s case, he missed this window for a do-over. You are allowed one lifetime do-over, or withdrawal of benefits, and you must repay all benefits received. If you were having your Medicare premiums deducted from your Social Security check, you'll need to repay those premiums, unless you decide to withdraw from Medicare coverage as well. If your spouse and children were collecting dependent benefits based on your earnings record, they must pay back these benefits and you must get their agreement in writing before you'll be allowed to withdraw your application. When you resume benefits at a later date, they will be at the starting amount for your age and earnings record at that new time.
  2. Suspending your benefit is allowed once you reach your FRA. James can do this when he turns 66 if he chooses. The advantage is that his benefit will be suspended at the level at the time of suspension, and it can now grow until he resumes taking it at any point up until age 70, when it reaches its maximum level. The advantage for James is the accrual of delayed retirement credits, which will result in a higher benefit level when he resumes his benefit.7 Note that if you suspend your benefit, no one will be allowed to draw benefits off your work record while your benefits are suspended. (For example, spousal and minor-child benefits would also be suspended.)
  3. Filing a restricted application. In some cases, it may be to your benefit to file what's known as a "restricted application." This means filing for a spousal benefit while leaving your own benefit untouched to grow as late as age 70. You can only file a restricted application if 1) you were born before January 2, 1954, 2) you have reached FRA, and 3) your spouse has filed for their benefit.

    Since Arlene did not turn 62 prior to December 31, 2015, she would not be eligible to file a restricted application for a spousal benefit based upon James's earnings record once she reaches her FRA. Each situation is unique, so talk with a financial advisor to learn the strategy that may work for you.

Benefits of working longer

Working into retirement can help in your retirement planning, especially if your savings are running a bit behind your goals. Continuing to work allows you to keep building retirement savings. If you meet the eligibility requirements, you can contribute to a 401(k) or other tax-deferred workplace savings plan, a health savings account (HSA), and an IRA, even if you are collecting Social Security. You can also make catch-up contributions, which enable you to set aside larger amounts of money for retirement.

Social Security can form the bedrock of your retirement income plan. That's because your benefits are inflation-protected and will last for the rest of your life. Consider working with your Fidelity financial advisor to explore options on how and when to claim your benefits.

Next steps to consider

Create your plan for retirement income.

Call or visit to set up an appointment.

Explore options on when and how to take Social Security.

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