Does Annuity Count as Income for Social Security?

Many people planning for retirement want to know if income from an annuity will reduce their Social Security benefits. The answer depends on which specific Social Security rule is being applied, as different regulations govern benefit calculations, taxation, and eligibility for various programs. Understanding how annuity income is treated under each distinct set of rules is important for financial planning. The impact of an annuity payment can vary significantly depending on whether one is considering the annual earnings limit, the taxation of benefits, or eligibility for needs-based assistance.

Annuities and the Social Security Earnings Limit

The Social Security Administration (SSA) imposes an annual earnings limit that applies only to individuals who receive retirement benefits before reaching their full retirement age (FRA). Your FRA is the age at which you are entitled to 100% of your benefit, and it ranges from 66 to 67 depending on your birth year. If you start benefits before this age and continue to work, the SSA may temporarily withhold benefits if your earnings exceed a set annual threshold.

This rule distinguishes between “earned income” and other sources of money. For the earnings test, the SSA is only concerned with income you actively work for, such as wages from a job or net earnings from self-employment. This is the type of income subject to Social Security and Medicare (FICA) taxes.

Conversely, income you do not actively work to receive is classified as “unearned income.” This category includes payments from pensions, interest, dividends, and capital gains. Payments from any type of annuity, whether qualified or non-qualified, fall into this category and are not counted toward the annual earnings limit. Therefore, annuity payments will not cause a reduction in your Social Security benefits.

The money withheld due to exceeding the earnings limit from work is not permanently lost. The SSA recalculates your benefit at your FRA to give you credit for the withheld amounts.

How Annuities Affect the Taxation of Your Benefits

While annuity income does not reduce your Social Security payments under the earnings limit, it can impact whether your benefits are subject to federal income tax. This is a separate issue governed by the Internal Revenue Service (IRS), not the SSA. The determining factor is a figure the IRS calls “provisional income” or “combined income,” which is used to calculate how much of your Social Security is taxable.

The formula for calculating your provisional income is: Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of your Social Security benefits. Your AGI includes wages, self-employment income, and the taxable portion of distributions from pensions and annuities. For a non-qualified annuity, only the earnings portion of the payment is taxable, while for a qualified annuity, the entire distribution is taxable.

The IRS has established specific income thresholds for taxing benefits.

• If you file as an individual and your provisional income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your Social Security benefits. If your provisional income is more than $34,000, up to 85% of your benefits may be taxable.
• For married couples filing jointly, the 50% threshold starts at a combined income of $32,000, and the 85% threshold begins at $44,000.

Consider a single filer who receives $20,000 in Social Security benefits and has no other income. Their provisional income would be $10,000 (50% of their benefits), well below the $25,000 threshold, so their benefits would be tax-free. If that person also begins receiving $18,000 in taxable payments from an annuity, their AGI is now $18,000. Their provisional income becomes $28,000 ($18,000 AGI + $10,000 from Social Security), pushing them over the limit and causing a portion of their benefits to become taxable.

Annuity Income and Supplemental Security Income (SSI) Eligibility

It is important to distinguish Social Security retirement benefits from Supplemental Security Income (SSI). SSI is a needs-based federal program administered by the SSA to provide financial assistance to aged, blind, or disabled individuals with very limited income and resources. Unlike Social Security retirement, which is based on your work history, SSI has strict financial limits that annuity income can affect.

For SSI purposes, regular payments from an annuity are considered “unearned income.” The SSI program has a monthly income limit, and any unearned income an individual receives reduces their SSI payment on a nearly dollar-for-dollar basis, after a small $20 general income exclusion. For example, if an individual qualifies for a $967 monthly federal SSI benefit but receives a $300 monthly payment from an annuity, their SSI payment would be reduced to $687 ($967 – ($300 – $20)).

Beyond the income test, SSI also has a strict resource limit. To be eligible, an individual cannot have more than $2,000 in countable resources, and a couple cannot have more than $3,000. The value of an annuity, specifically its cash surrender value, can be counted as a resource. An annuity with a cash surrender value of $5,000 would make a single individual ineligible for SSI, as it exceeds the $2,000 resource limit.