Social Security Earnings Test: 3 Sources Affecting Benefits
If you’re considering claiming Social Security early, understanding the Social Security earnings test is critical.
In this video, we discuss the social security earnings test, who it applies to, and what income actually counts toward the limit.
The Social Security Administration applies the earnings test to earned income (W-2 wages and net self-employment income subject to FICA taxes).
What about 401(k) distributions, IRA withdrawals, Roth IRA income, pension payments, annuities, capital gains, dividends, interest, rental income, or required minimum distributions (RMDs)?
If you’re weighing when to claim benefits at 62, 66, or 67, this overview will help you better understand how earned income can impact your Social Security benefits. And how different income sources are treated under current rules.
Key Takeaways:
- The Social Security earnings test applies only if you are taking benefits before full retirement age.
- Only earned income counts.
- 401(k) and IRA distributions do not count toward the earnings test.
- Pension income, annuities, capital gains, dividends, and most rental income are excluded.
- Proper income planning is essential when claiming Social Security early.
Social Security Earnings Test: 3 Sources Affecting Benefits – Links
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Social Security Earnings Test: 3 Sources Affecting Benefits – Transcript
We recently did a video on “Should I Claim Social Security Early?”
We’ll link to that video up here — if you haven’t seen it.
But we’ve received some additional questions about this social security earnings test.
And we wanted to spend a little more time delving into this.
The social security earnings test really applies to folks who are looking to claim social security early — at age 62, up to, and including, the year of their full retirement age.
For many people, now that is 67.
Or, if you were born before 1960, that’s 66 plus a few months.
But the question almost comes up like, “what if I make too much money? Will Social Security claw some of this money back?”
Yes, they will.
To shed a little more light on this, we’ve been asked, “Hey, what kind of things are included in this social security earnings test?”
I wanted to make this video so we could walk through a little more detail on this.
Are distributions from a 401k or an IRA?
Are those considered part of your social security earnings test?
Are they part of your earnings? The answer is no.
401k and IRA distributions don’t count toward the Social security earnings test.
The earnings test, administered by Social Security Administration, applies ONLY to “Ernie Income..”
It has to be earned income.
This is money that’s subject to FICA taxes… that’s one example.
So… compensation, like W2 income, that is definitely going to be included in the earnings test.
If you’re self-employed, net earnings from your self-employment are going to be included in the social security earnings test.
The labor, the work that you do, that’s subject to FICA payroll taxes is a shortcut to know whether it’s going to be included in the social security earnings test — or not.
So what kind of things DON’T count when it comes to the earnings test?
Well, as we already mentioned, 401k distributions. IRA distributions.
Roth IRA withdrawals — not included in the earnings test.
You paid tax on that money on the way in! And if you do it right, you’re going to be taking money out of a Roth IRA without any taxes.
Not included in the earnings test.
What else? Pension income, annuity income … annuity payments, capital gains dividends, interest that you earn on investments.
These are not going to be included in the social security earnings test.
What about rental income?
Suppose you own the house next door and you collect rent on a monthly basis.
Not included in the earnings test — unless you materially participate in rentals as self-employment income, (then) this is probably not going to be included in the earnings test.
But your tax preparer will have the final say when it comes to things like this.
Also, you know, we’re talking about IRAs and 401k’s — required minimum distributions, which we did several videos on… — Required Minimum Distributions — not included in the social security earnings test.
So if you are, say you’re 62 years old or 63 years old, and you withdrew money from your 401k or your IRA, BUT you have zero earned income, you’re probably going to be all right.
Again, not tax advice, not legal advice.
But, these are the type of questions that we’re asked all the time.
So if you’ve got questions about this… make sure you’re talking with your financial planner about things like, “Hey, is this income going to be subject to the Social Security earnings test?”
It’s important.
