Social Security benefits can potentially make or break the retirement of many older Americans. In fact, about 1 in 5 baby boomers say Social Security is their only source of retirement income, according to a 2020 National Retirement Institute survey.
If you plan to rely on your benefits in any capacity in retirement, it’s wise to make sure you receive as many of them as possible. And there are a few unexpected ways you can lose your perks without realizing it.
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1. Taxes
Your Social Security benefits may be subject to both federal and state retirement income tax. Whether or not you owe state taxes will depend on where you live, and the good news is that 38 states don’t tax Social Security at all.
Federal taxes will depend on a number called your “combined income,” which is your adjusted gross income plus half of your annual Social Security benefit amount. So, for example, if you withdraw $30,000 per year from your 401(k) and earn $20,000 per year in benefits, your combined income is $40,000 per year.
If your combined income is more than $25,000 per year (or $32,000 per year for married couples filing taxes jointly), you will have to pay federal taxes on a portion of your benefits.
2. Unpaid debts
In some cases, the Social Security Administration may withhold part of your benefits if you have certain types of unpaid debts.
These debts can include unpaid child support, alimony, or restitution. The Treasury Department can also garnish your benefits to cover unpaid tax debts, withholding up to 15% of your monthly checks until you pay off your debt.
3. Delaying benefits too long
In general, waiting to file a Social Security claim will result in a higher benefit amount. However, it is possible to delay too long, in which case you could miss the money owed to you.
You can apply for benefits at age 62 or any later age. By deferring Social Security until age 70, you will receive the highest amount of benefits. Delaying past age 70, however, won’t result in larger checks.
If you’re still working at age 70, it’s best to start claiming Social Security whether you’re ready to file or not. If you wait until after this age to file your return, you will simply miss the money to which you are entitled.
4. Earn too much
You can continue to work even after applying for benefits, but if you have not yet reached full retirement age (FRA), part of your payments may be withheld.
The amount of your benefits that will be withheld depends on your salary and your age. If you don’t reach your FRA in 2022, your Social Security will be reduced by $1 for every $2 you earn over the $19,560 per year limit. So, for example, if you earn $25,000 a year at your job, that’s $5,440 over the limit, so your benefits will be reduced by $2,720 a year.
If you reach your FRA this year, your earnings are subject to a different limit. In this case, your payments will be reduced by $1 for every $3 you earn above $51,960 per year.
Fortunately, these reductions are only temporary. Once you reach your FRA, the Social Security Administration will recalculate your benefit amount to account for any deductions. But even though you technically aren’t losing money, if you were relying on that monthly income in retirement, you might be surprised if you earn too much.
Making the Most of Social Security
Social security benefits are often an important source of income for retirees. By understanding as much as you can about how the program works, you can get every penny out of Social Security and enjoy a more financially comfortable retirement.
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