If you take Social Security benefits before you reach your full retirement age, and you earn an annual income in excess of the annual earnings limit for that year, your monthly Social Security benefit will be reduced for the remainder of the year in which you exceed the limit. If you will reach full retirement age during that same year, it will be reduced every month until you reach full retirement age.
The income withheld will be paid out once you reach full retirement age. In other words, your benefits aren't lost; they're delayed.
Investment income does not count toward the annual earnings limit; the only income that counts is earned income—the income you earn by working either for someone or as a self-employed person.
- Social Security is reduced if you begin withdrawing before full retirement age and earn over the income limit.
- If your Social Security is reduced because you're earning too much, you'll get the money back after reaching full retirement age.
- You can avoid the reduction by waiting until full retirement age to begin withdrawing from Social Security.
How Much Can I Earn?
In 2020, the annual Social Security earnings limit for those reaching full retirement age (FRA) in 2021 or later is $18,240. In 2021, the limit is $18,950 for those reaching their full retirement age in 2022 or later. In 2019, the annual earnings limit for those achieving full retirement age in 2020 or later was $17,640. Full retirement age is based on your year of birth.
If you earn over the limit, there are rules that determine how much your Social Security benefits will be reduced. There are three different earnings limit rules that apply, depending on whether you earn the income before, during, or after the year your reach full retirement age.
Each option is covered below.
1. Income Earned Before the Year You Reach Full Retirement Age
If you are collecting Social Security benefits, and earn more than the annual earnings limit in a year in which you will not be reaching your full retirement age, Social Security will take back $1 of Social Security for every $2 you earn over the limit. This is a serious reduction.
This reduction applies to any year before you reach full retirement age, and it applies to income earned the entire year, even if you were not eligible for Social Security the entire year. So if you work a partial year, the income you earn before the month you start collecting Social Security benefits still counts toward the annual earnings limit. So if you work a partial year, the income you earn before the month you start collecting Social Security benefits does not count toward the annual earnings limit.
Sometimes Social Security website pages use the term "normal retirement age." It means the same thing as full retirement age.
2. Income Earned During the Year You Reach FRA
During the year you reach FRA, and up to the month you reach FRA, Social Security will deduct $1 for every $3 you earn that is over the annual earnings limit. For the year in which you will reach FRA, the earnings limit is different.
In 2020, the earnings limit is $48,600, which means that you can earn up to $46,600 before having any pay deducted. The limit is $50,520 for those reaching FRA in 2021. During the year in which you reach FRA, Social Security only counts earnings that you receive before the month you reach FRA.
For example, let's assume you were born in 1954, which means your FRA is age 66. You turned 66 in June 2020 and began your Social Security benefits at that time. You earned $44,000 from January through May of 2020. Your benefits will not be reduced because you earned less than $48,600 during the months before you attained full retirement age.
The Social Security website provides additional examples of how this deduction works. You can also use the earnings test calculator, and plug in your date of birth and expected earnings to see if you think a reduction will apply to you.
3. Income Earned After You Reach FRA
Once you reach FRA, you are no longer subject to the annual earnings limit. You can earn as much as you like without incurring a reduction in your Social Security benefits. Your benefits may, however, still be subject to income taxes.
Best Way to Avoid the Earnings Limit
The best way to avoid the earnings limit is to wait until you reach FRA to begin your benefits. Understandably, some people have no choice and must start benefits because they are laid off and they have no other income or assets. If this happens to you but your situation changes and you go back to work, you can withdraw your application for Social Security within 12 months of starting benefits.
Other people, however, do have a choice; perhaps they could use some of their savings or retirement money to tide them over until they reach FRA. This may be a better option than starting Social Security early.
What Counts as Earnings?
Unemployment income does not count as earnings toward the earnings test above. If you are earning wages, income counts when it is earned, not when it is paid. The IRS provides additional details on what is and is not considered to be earned income.
Earnings Limit Is Indexed to Inflation
The earnings limit will adjust upward each year depending on the formal measure of inflation which is the Consumer Price Index. In the table below you see past years' limits for pre-FRA. In the years where it did not change inflation was quite low or negative.