What You Need to Know
- The retirement earnings test limits the amount of work-related income a person can have while claiming benefits before full retirement age.
- Once clients have reached full retirement age, they can have unlimited income and still claim full benefits.
- The monthly earnings test can only help a client; it can’t hurt one that would otherwise be under the annual earnings test amount.
If you have clients making Social Security claiming decisions, you’ve likely heard them lament their belief that they can’t claim because they “make too much.” The root of the complaint is the retirement earnings test, which limits the amount of work-related income a person can have and still claim benefits before reaching full retirement age.
Once they have reached full retirement age, however, they can have an unlimited amount of income and still claim full benefits. Understanding the earnings test rules can allow you to tailor claiming strategies, even for those who at first glance may seem to have income more than the earnings test exempt amounts.
There are two earnings tests: the annual earnings test and the monthly earnings test. There are two sets of exempt amount thresholds for each: one for the year the client reaches full retirement age and one for all years prior.
Annual Earnings Test
Different thresholds are used to determine if the client is subject to the annual earnings test. In the years leading up to full retirement age, the threshold is lower. In 2022, the annual exempt amount is $19,560. For every $2 of earnings that exceed $19,560, the Social Security Administration withholds $1 in benefits.
For those who reach full retirement age this year, the annual exempt amount is $51,960. But this applies only to earnings made in the months prior to the month the client attains full retirement age. For every $3 of earnings that exceed the $51,960 threshold, the Social Security Administration will withhold $1 in benefits. Earnings received in the month the client reaches full retirement age are not counted toward the test.
Monthly Earnings Test
A person can claim benefits even if they are over the annual earnings test threshold for the year by using the monthly earnings test. This is particularly valuable in the year of retirement or in a year with a significant work change. The monthly test can be used for only one year.
Let’s say you have a client who retired in May at age 62½ who earned $10,000 per month. They had earned $50,000 by the end of May, when they retired. The annual earnings test would eliminate their benefit for the year; the monthly earnings test, however, would allow them to claim a benefit for each month that their earned income is below 1/12 of the annual threshold amount. If you have any clients planning to retire midyear, take a close look at the monthly earnings test.
Interaction Between the Monthly and Annual Earnings Tests
If the same scenario occurred in the year the client reached full retirement age, the client could claim in January, using the annual earnings test with no earnings test penalty. Although the months from January to May were over the monthly earnings test amount, the total earnings for the year were below the much higher threshold for the year the client reaches full retirement age. In other words, the monthly earnings test can only help a client; it can’t hurt a client that would otherwise be under the annual earnings test amount.