Additional Coverage:
Understanding Social Security: What Income Won’t Affect Your Early Benefits?
For many, the option to begin receiving Social Security benefits as early as age 62 offers a welcome financial boost. However, starting benefits before your Full Retirement Age (FRA) comes with important considerations, primarily a reduction in your monthly payment.
Not only is your check permanently lowered for starting early, but there’s also an annual earnings limit that can temporarily reduce your benefits further. For every $2 you earn over the current annual limit of $23,400 (for 2023), $1 is deducted from your Social Security checks until you reach your FRA.
The good news is that any benefits reduced due to early earnings aren’t lost forever; they’re factored back into your monthly payment once you reach your FRA. More importantly, not all income counts toward that earnings limit. Understanding which types of income are exempt can provide crucial flexibility if you need to access your Social Security benefits before your FRA while still working or receiving other payments.
Here’s a look at income sources that typically won’t impact your Social Security benefits if you’re receiving them before your Full Retirement Age:
1. Interest and Dividend Income
Only income earned from a job or self-employment counts toward the Social Security earnings limit. This means that money generated from investments, such as interest from savings accounts or dividends from stocks and bonds, will not reduce your benefits.
2. Individual Retirement Account (IRA) Withdrawals
If you’re supplementing your income by drawing funds from an Individual Retirement Account (IRA), those withdrawals are generally not considered earned income by Social Security and will not count against your earnings limit.
3. Pensions and Other Retirement Pay
Income received from a pension or other employer-sponsored retirement plans does not count toward the Social Security earnings limit when you’re taking benefits before your FRA.
4. Rental Property Income
Money earned from renting out a property you own typically doesn’t count toward your Social Security earnings limit. This exemption generally applies as long as managing rental properties isn’t considered your primary job or business.
5. Inheritances or Gifts
Funds received as an inheritance or a gift are not classified as earned income for Social Security purposes and will not affect your benefits. It’s also worth noting that, depending on the amount and state laws, these funds may not be subject to income taxes either.
6. Certain VA Benefits
Various benefits from the Department of Veterans Affairs (VA), such as disability payments or compensation, do not count as earned income and will not reduce your Social Security benefits.
7. Unemployment Benefits
Should you find yourself receiving unemployment benefits while also collecting Social Security before your FRA, that unemployment income will not count toward the earnings limit. However, be aware that receiving Social Security could potentially impact how your state calculates your unemployment benefits, so it’s wise to check with your state’s unemployment office.
8. Workers’ Compensation Benefits
Payments received from workers’ compensation insurance are not considered earned income for Social Security purposes and will not lead to a reduction in your monthly benefit.
9. Exempt Trust Funds and Annuity Plans
Some trust funds and annuity plans are structured to be exempt from federal income tax requirements. If your payments from these sources are tax-exempt, they are typically also exempt from contributing to your Social Security earnings limit.
10. Awards and Prizes
Awards for length of service or achievement in a specific field, as well as prize winnings from individual contests (not related to a business), are generally not considered earned income and will not reduce your benefits.
11. Income Earned After Full Retirement Age
Once you reach your Full Retirement Age, the earnings limit no longer applies. You can earn any amount from a job without it affecting your Social Security benefits.
At this point, you’ll also begin to receive increased benefit checks to make up for any amounts that were withheld due to the earnings limit in prior years. This change takes effect in the month of your birth.
The Bottom Line
While starting Social Security benefits early offers immediate financial relief, delaying until at least your Full Retirement Age can lead to higher monthly payments and eliminate concerns about earnings limits. However, individual circumstances vary greatly. For personalized guidance on when to claim your Social Security benefits and how different income sources might affect them, consulting a qualified financial advisor, especially one specializing in retirement planning, is always recommended.