What Is the Special Rule for First-Year Retirement Earnings?

The Social Security Administration (SSA) has specific rules governing how earned income impacts retirement benefits, particularly during the initial year of claiming. Understanding these regulations is important for effectively managing your income streams as you transition from full-time employment into retirement.

The Retirement Earnings Test for the First Year

The Social Security Administration implements a distinct “retirement earnings test” during the first year an individual begins receiving benefits, especially if they are below their full retirement age (FRA). This special rule differs from the annual earnings limits applied in subsequent years.

For 2024, if you are under your full retirement age for the entire year, benefits are reduced if your earnings exceed an annual limit of $22,320. However, in this initial year, a monthly earnings limit also applies. For 2024, the monthly limit for those under full retirement age is $1,860. If your earnings in any single month exceed this threshold, the SSA will withhold benefits for that month, regardless of your total earnings for the year up to that point.

A different, higher earnings limit applies if you reach your full retirement age during the first year of receiving benefits. For 2024, this limit is $59,520, but it only applies to earnings in the months before you reach your full retirement age. In this scenario, the monthly limit for 2024 is $4,960 for the months prior to your full retirement age. This provision allows individuals who retire mid-year to receive benefits for the months they are genuinely retired, without being penalized for higher earnings earlier in the year.

Calculating Earnings and Benefit Withholding

Only wages from employment and net earnings from self-employment are considered in the earnings test. This includes salaries, commissions, bonuses, and even vacation pay. For self-employed individuals, the net profit from their business is the figure used for the earnings test.

Conversely, many other types of income do not count towards the earnings test. These non-countable sources include pensions, annuities, investment income, interest, dividends, and capital gains. Other government or military retirement benefits, as well as veterans’ benefits, are also excluded from this calculation.

If your countable earnings exceed the applicable limit, the Social Security Administration will withhold a portion of your benefits. For those under full retirement age, $1 in benefits is withheld for every $2 earned above the annual limit. For example, if you earn $2,000 over the annual limit, $1,000 will be withheld from your benefits. If you reach full retirement age during the year, $1 in benefits is withheld for every $3 earned above the higher limit, but only for earnings prior to the month you reach your full retirement age. The SSA may withhold an entire month’s benefit check until the total amount to be withheld is recovered.

Rules for Subsequent Years

The rules governing the earnings test change significantly after the first year of receiving Social Security benefits. In subsequent years, the monthly earnings limit no longer applies, and only an annual earnings limit is used.

For individuals who are below full retirement age for the entire year, the annual limit for 2024 is $22,320. The withholding rate remains $1 in benefits for every $2 earned above this annual limit.

A different, higher annual limit applies in the year an individual reaches their full retirement age, specifically for earnings accumulated before the month of their birthday. For 2024, this limit is $59,520. For earnings exceeding this amount in those pre-FRA months, $1 in benefits is withheld for every $3 earned. These earnings limits are subject to annual adjustments based on changes in the national average wage index.

Crucially, once an individual reaches their full retirement age, the earnings test ceases to apply. Any benefits that were withheld in prior years due to the earnings test are not permanently lost; instead, the Social Security Administration will recalculate your monthly benefit amount at your full retirement age to account for the previously withheld payments, often resulting in a higher ongoing benefit.

Reporting Your Earnings

Accurately reporting your earnings to the Social Security Administration (SSA) is a necessary step when receiving retirement benefits, especially if you are working. It is important to provide the SSA with an estimate of your expected earnings for the year when you first apply for benefits or if your work situation changes. This initial estimate helps the SSA determine the correct benefit amount to pay you.

If your actual earnings differ significantly from your initial estimate, you should promptly update the SSA. Failure to report changes in earnings can lead to overpayments, which you would then be required to repay.

The SSA offers various methods for reporting your earnings. You can report your earnings online through your personal “my Social Security” account, which provides a convenient and secure way to manage your information. Alternatively, you may report earnings by phone, by mail, or by visiting a local SSA office in person. Maintaining records of your reports and any communication with the SSA is a good practice for your financial documentation.