There's a Hidden Catch if You Work While Collecting Social Security After FRA

If you’re planning on working while collecting Social Security retirement benefits, you must be aware of the rules.

Unfortunately, these rules may be more complicated than you think — and there’s actually a hidden catch that could cause you to lose some of your retirement money when you may not expect it. Here’s what you need to know.

Don’t get surprised by how work will affect your Social Security checks

If you’ve looked into the rules for working while collecting Social Security, you’ve probably seen that you temporarily forfeit some benefits if you earn too much money when you haven’t yet reached your full retirement age (FRA). However, you may also have been told that you can work as much as you want once you have reached your FRA, and you won’t have to worry about losing any benefits.

This is partially true. There is no earnings limit like the ones that apply when you’re younger. For example:

• If you won’t reach FRA all year, then once you earn $24,480, you temporarily forfeit $1 for every $2 above this amount.
• If you’ll reach FRA at some point during the year but haven’t yet, you temporarily forfeit $1 for every $3 earned above $65,160.

The specific amount you can earn changes over time to account for inflation, but there’s always a cap. However, this kind of limit doesn’t apply once you’ve reached FRA.

Unfortunately, that doesn’t mean you’re in the clear and will still get to keep the full amount of Social Security benefits you’re entitled to. There’s a surprise trap that could affect your finances. It comes in the form of taxes on Social Security.

If you don’t plan for the impact that the tax rules could have, you may find yourself surprised to keep less Social Security income, and you could be forced to rely too heavily on distributions from retirement plans. You don’t want that to happen, so you need to know the truth about working after FRA.

Here’s how working after FRA can affect your Social Security checks

When you earn too much money after FRA, the issue you’ll likely face is that part of your Social Security benefits may become taxable thanks to your paycheck.

See:

• Once you have a provisional income of $25,000 as a single tax filer or $32,000 as a married filer, you’re taxed on up to 50% of your benefits.
• Once your provisional income hits $34,000 for single filers or $44,000 for married joint filers, you owe tax on up to 85% of benefits.

Provisional income is half your Social Security, all of your taxable income, and only limited nontaxable income. And these thresholds aren’t indexed to inflation, so more older people end up paying taxes on Social Security each year.

If you weren’t expecting tax on benefits, this can come as a shock — especially if you thought there was no negative financial impact of working while on Social Security after FRA. Now, many people still find it worth it to work despite the impact on the taxation of their Social Security checks. But you need to be aware that taxes could take a bite out of your Social Security once your income crosses these thresholds.

And, unlike when you work before FRA, and your payments are temporarily forfeited, but you eventually get the money back, you don’t get this tax money returned to you. Once you earn too much and your benefits are taxed, that money goes to the IRS and is gone for good. You need to plan for that when you consider the financial impact of working and collecting Social Security at the same time, so you aren’t caught off guard.