Social Security can reduce your retirement benefits if you have too much income. However, the government does not count every type of income in computing the total you can receive. Additionally, if you are old enough, Social Security will not reduce your benefits even if you exceed the maximum permissible income for the year.
Basic Rules for Earnings
After you reach full retirement age, you can earn any amount with no reduction in your Social Security benefits. Your full retirement age depends upon the year of your birth. For those with birthdays between between 1943 and 1954, you'll reach full retirement age at 66. Use Social Security's online chart for Benefits by Year of Birth to find your full retirement age.
If you work and collect benefits and have not reached retirement age in 2021, Social Security will reduce your payments by $1 for each $2 of earnings over $18,960. Special retirement benefits rules allow higher earnings the year you retire and the year you reach full retirement age. If you are of full retirement age during 2021, your payments will be reduced by $1 for each $3 after $50,520.
Income from self-employment counts when you receive it, but income from wages counts when you earn it.
Exclusions Apply for Certain Income
The Social Security Administration considers only earnings from employment or profits from self-employment in your total income when reducing your Social Security. It does not count any retirement or pension income in computing the allowable maximum. Thus withdrawals from IRAs or payments from pensions and annuities do not count against your Social Security benefits. Other types of unearned income not affecting your benefits include capital gains, interest or other government assistance.
Income Taxes on IRA Distributions
Even though IRA distributions do not affect your Social Security benefits, you still have to pay income taxes on the proceeds in most cases. Unless you roll over an IRA distribution, you must pay income taxes on the distribution amount in the tax year when you receive it. However, you do not have to pay income taxes on contributions from your IRA to a charity that has tax-deductible status.
Another way to avoid the IRS taxes for withdrawing from a retirement account is to invest in a Roth IRA. This type of IRA is made with taxed dollars so the IRS will not further tax you in retirement for withdrawals.
Planning Your Retirement
Social Security provides online tools to help plan your retirement. Use the retirement estimator to calculate your benefits according to your actual work record. If you also qualify for a pension on a job for which you did not pay Social Security taxes, choose the detailed benefit calculator. It includes the Windfall Elimination Provision, which reduces your Social Security by a portion of your other pension.
Use the government pension offset calculator if you have a pension from such a job and expect to receive Social Security benefits as a spouse, widower or widow. To get additional help, contact Social Security by phone at 800-772-1213 weekdays from 7 a.m. to 7 p.m. to talk to a representative.