I’ll admit, this topic can be confusing. First, let’s start with Social Security’s definition of full retirement age. Depending on your birth year, full retirement age ranges from age 66 to 67. For our purpose, we will assume a full retirement age of 67. What’s important about your full retirement age? The annual earnings limitation only applies if you file for Social Security benefits before you reach your full retirement age. For most people, the earliest you can apply for Social Security retirement benefits is age 62. Therefore, the annual earnings limitation is effective for ages between 62 to 67. At your full retirement age, the annual earnings limitation goes away. Why is that? Social Security considers you fully retired at your “full retirement age.” Therefore, at your full retirement age, you can make any amount of income, and you will not be subjected to the earnings limitation. If you file for benefits early, between the ages of 62 to 67, you are basically saying to Social Security that you are considering yourself fully retired. Since Social Security does not consider you fully retired because you have not reached your full retirement age, you are allowed to earn wages and/or self-employment income in 2025 up to the amount of $23,400 without being subjected to the annual earnings limitation. If you exceed this amount, you are not considered fully retired and Social Security will apply the annual earnings limitation calculation. The limitation is based on W-2 income and self-employment income only. Any other type of income such as interest, dividends, capital gains, rental income, IRA/401K distributions, etc., is not considered income.
The reason it’s called the annual earnings limitation is because it is based on the calendar year. If you exceed $23,400 in a calendar year, Social Security will withhold $1 for every $2 you are over the limit. For example, if you made $43,400, you would be $20,000 over the limit, and since it’s $1 for $2 ratio, Social Security would withhold $10,000. If you were receiving a monthly benefit that was $1,750, Social Security would withhold 6 months payments since they cannot withhold partial amounts. In the year you reach your full retirement age, in 2025, the limitation is increased from $23,400 to $62,160, and instead of a $1 for $2 ratio, it’s a $1 to $3 ratio, meaning for every $3 over $62,160, Social Security will withhold $1.
What happens in our situation above where the person retires on June 30?
The annual earnings limitation only comes into play when you start collecting Social Security benefits before your full retirement age. So, for example, if you retire at age 65 and that happens to be on June 30, Social Security is not concerned with what you earned prior to July 1. The annual earnings limitation is only applied to earnings after June 30 to your full retirement age of 67. There is a special rule that in the year of retirement, and only in that first year, you can use what’s called the monthly limitation, if this is beneficial to you. Remember, we determined that Social Security is not concerned with earnings prior to collecting benefits, so in this situation, earnings from January to June are not considered, only earnings from July to December are what Social Security is concerned about. Instead of using the annual limitation, you can use the monthly limitation in the retirement year only. As long as you do not exceed monthly earnings in excess of $1,950 a month ($23,400/12), the earnings limitation does not apply. If you go over the limitation in any month, the limitation only applies to that month. In the following year, you are then subject to the annual earnings limitation. This exception is generally used by mid-year retirees.
What happens if you get paid a bonus, vacation/sick pay, severance pay, back pay etc., in a month after you retire and start collecting benefits?
Social Security refers to this as “Special Payments,” and as long as these earnings were completed before you stopped working, but paid after your retirement date, they do not count towards the limitation. You may have to explain this to Social Security in the future as they are provided with information from the IRS based on your tax return which is annual.
What happens if after you start collecting Social Security benefits before your full retirements age you go back to work or know you will be making significantly more than the limitation of $23,400 allows?
Obviously, life happens, so you may start to collect Social Security benefits before you reach your full retirement age thinking you are fully retired, and an excellent job offer comes along. Or you get bored and go back to work.
You should contact Social Security and let them know you will exceed the annual earnings limitation. They will begin to withhold benefits. You do not want to be in a situation where your Social Security benefits are overpaid because Social Security did not know you are exceeding the annual limit. If this happens, you will need to pay back all of the overpayment in full. The Social Security Administration just issued a new directive on 3/7/2025 to reinstate the overpayment recovery rate to 100% starting on 3/27/2025. This means that if you are overpaid, Social Security will withhold your whole benefit check until the overpayment is recovered. This new directive is only for overpayments received after 3/27/2025. If you already have an overpayment recovery agreement prior to 3/27/2025, that will not be amended. See link for more information: Social Security to Reinstate Overpayment Recovery Rate | SSA
Will I lose those benefits because I am subjected to the earnings limitation?
No! You will never lose your benefit assuming you live to life expectancy. Many people think that if you exceed the earnings limit you lose your Social Security benefit, and that’s not true. You never lose your benefit, it’s when they are paid. Social Security uses what’s called the adjusted reduction factor to recalculate your benefits when they start again. That’s why the term “withheld” is used. If you are subjected to the earnings limitation, this will ultimately result in a higher monthly benefit payment when payments start again or at the latest when you reach your full retirement age when the earnings limitation does not apply any more.
Remember, take the wrong benefit at the wrong time, it’s always smaller and forever.
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