Understanding Social Security's Earnings
ERISA consultants at the Retirement Learning Center (RLC) frequently receive questions about IRAs, retirement plans, and Social Security. This week’s case addresses a common question about Social Security benefits and IRA distributions.
Question
A financial advisor asked: My client, turning 62 and working, wants to start collecting Social Security. A Social Security Administration (SSA) representative said taking a distribution from his IRA could reduce his Social Security benefit if he retires early. Is this true?
Highlights of the Discussion
The answer is, “No.” The SSA’s “Earnings Test” applies to earned income, not IRA distributions. IRA distributions are not considered earned income by the SSA. It’s important to consult a tax or legal advisor before making Social Security decisions.
SSA Earnings Test Overview
- Before Full Retirement Age (FRA): Claiming Social Security before FRA (65-67, depending on birth year) results in the SSA withholding $1 for every $2 earned over the annual limit ($22,320 for 2024).
- In the Year of FRA: The SSA withholds $1 for every $3 earned over the limit ($59,520 for 2024), counting earnings only up to the month before reaching FRA.
- Non-Countable Income: The SSA does not count pensions, annuities, investment income, interest, or IRA distributions as earnings that reduce Social Security benefits.
Anyone planning to claim Social Security benefits before FRA while working should understand the Earnings Test to avoid reductions in benefits due to earned income. IRA distributions do not count as earned income for this purpose.
