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about investing, saving, personal finance, retirement, insurance, saving on taxes, college funding, financial literacy, estate planning, consumer education, long term care, financial services, help for seniors and business owners.
The Billion-Dollar Stakes for OpenAI
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Maximizing Employer Stock Options
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Oct 29 – On this edition of Lifetime Income, Paul Horn and Chris Preitauer
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Do you plan to work in retirement? If so, you need to be aware, if you’ve begun taking Social Security benefits, of how your Social Security income may be taxed—and the earned income thresholds that determine the level of your taxes and any reductions in benefits.
Thirty-seven percent of people in a recent AARP survey indicated that they plan to work either full time or part time during retirement.1 Why? In addition to the financial benefits, many older workers find that a job can add valuable structure to their day and provide the mental stimulation that comes from interacting with co-workers, clients, and other work associates.
Among those who plan to work in retirement out of financial necessity, a survey by the Transamerica Center for Retirement Studies found 43% expected to use the money to cover essential expenses, 37% to pay for health care, and 20% to save more for retirement.2
Whatever your reason for considering working in retirement, it’s a good idea to know how doing so will affect your Social Security benefits and your tax bill. Here are the facts plus some strategies to consider.
Temporary benefit reductions for earned income
Note that “earned” income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they are all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of “unearned” income.
The earliest age at which you are eligible to claim Social Security benefits is 62. If you claim your benefits and continue to work, there is an earnings restriction until you reach your full retirement age (FRA) of 66. If you have earned income in excess of $15,720 in 2016, your benefits will be reduced by $1 for every $2 of earned income over the $15,720 limit.
If you reach your FRA during 2016, the limit for earned income rises to $41,880 and the benefits reduction is $1 for every $3 earned over the limit until the month you reach your FRA. After that, there are no earnings limits and no benefit reductions based upon earned income.
For example, if your monthly benefit was $2,000, here is how much your benefit would be reduced for various levels of earned income at certain ages:
These benefits are not truly “lost,” however. If your benefits have been reduced due to earning too much prior to reaching your FRA, you will get these benefits back at your FRA when your monthly Social Security check will be increased to account for benefits withheld earlier due to excess earnings.3
Income tax implications
Social Security benefits are subject to federal income taxes above certain levels of “combined income.” Combined income consists of your adjusted gross income (AGI), nontaxable interest, and one-half of your Social Security benefits. (See: "Income Taxes And Your Social Security Benefits," for more information.)
For individual filers with combined incomes of $25,000 to $34,000, 50% of your Social Security benefit may subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.
Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.
Additionally, 13 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if this affects you.4
Social Security and Medicare taxes
In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.
The good news is that these earnings can also count toward the calculation of your benefits: Social Security checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.5
What if you are making much less in retirement than before? Could it hurt your benefits? The answer is no, because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.
The big decision: When to claim Social Security
When to claim Social Security benefits will be one of the most important decisions that you make regarding your retirement, along with how to take retirement income from your various retirement accounts and how you will fund your health care needs in retirement. The following chart shows the difference for someone turning 62 in 2016. Let’s assume his or her annual salary at retirement is $100,000. The first set of numbers on the chart shows the benefit amounts he or she would receive by claiming at various ages.
The bottom row of the chart expresses the differences as a percentage of the benefit amount received by claiming at your FRA for someone born in the years from 1943 to 1954.7
A change in the rules in late 2015 closed the door on the popular claiming strategy for couples that allowed one spouse to file and suspend his or her benefit while the other spouse files a restricted application for a spousal benefit based on the first spouse’s earnings record. This option ends as of April 30, 2016.
You should also be aware of a special rule for the first year of retirement. This rule allows you to get a full Social Security check for any whole month you’re retired, regardless of your yearly earnings. This helps people who retire in midyear or later who have already earned more than the annual earnings limit.
Going back to work—meet James
In our hypothetical example, James, age 64, retired at 62 from a plumbing supply company in the Chicago area, and claimed Social Security benefits as soon as he was eligible, at 62. James misses not having some structure in his day. He loves home improvement and helping people, so he found a job at a big box retailer. His wife, Arlene, age 61, is still working part time. Both have FRAs of age 66.
Three Social Security options for James to consider
Social Security do-overs are allowed within 12 months of commencing benefit payments.8 In James’s case, he missed this window for a do-over. You are allowed one lifetime do-over, or withdrawal of benefits, and you must repay all benefits received. This includes, in addition to your own benefits, any benefits received by other family members based upon your earnings record, whether or not they are living with you; any monies withheld for Medicare payments; and any garnishments that may have been withheld from your benefit payments. When you resume benefits at a later date, they will be at the starting amount for your age and earnings record at that new time.
Suspending your benefit is allowed once your reach your FRA. James can do this when he turns 66 if he chooses. The advantage is that his benefit will be suspended at the level at the time of suspension, and it can now grow until he resumes taking it at any point up until age 70, when it reaches its maximum level. The advantage for James is the accrual of delayed retirement credits, which will result in a higher benefit level when he resumes his benefit.9 However, he will pay taxes on earned income. Under the new rules, once James suspends his benefit, no one, including his spouse, can receive a benefit from his earnings record.
Filing a restricted application. Since Arlene did not turn 62 prior to December 31, 2015, she would not be eligible to file a restricted application for a spousal benefit based upon James’s earnings record once she reaches her FRA, to allow her own benefit to continue accruing. She would have to choose between filing a spousal benefit or her own benefit when she files. This might be advantageous for the couple, and could provide a reason for James to continue drawing his benefit.
Benefits of working longer
Working into retirement can help in your retirement planning, especially if your savings are running a bit behind your goals. Continuing to work allows you to keep building retirement savings. If you meet the eligibility requirements, you can contribute to a 401(k) or other tax-deferred workplace savings plan, a health savings account (HSA), and an IRA, even if you are collecting Social Security. You can also make catch-up contributions, which enable you to set aside larger amounts of money for retirement. The combination of the added savings, tax-deferred growth potential, the ability to delay claiming Social Security benefits, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.
4. The states are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
6. "Social Security Benefits Calculator: When Should You Claim Yours?" AARP.org. Social Security benefits are calculated based on an estimated annual salary that is representative of the person’s average salary over his or her work history and including the top 35 years of earnings.
1. In general, what requirements must be met to qualify a person for retirement benefits?
An individual is entitled to a retirement benefit if he or she: (1) is fully insured, (2) is at least age 62 throughout the first month of entitlement, and (3) has filed an application for retirement benefits.
2. Must a person be fully insured to qualify for retirement benefits?
Yes. (But a small monthly benefit is payable to some men who became age 72 before 1972 and some women who became age 72 before 1970).
3. What is the earliest age at which a person can start to receive retirement benefits?
Age 62. A retired worker who is fully insured can elect to start receiving a reduced benefit at any time between ages 62 and full retirement age (which is gradually increasing from 65 to 67; see below) when he would receive the full benefit rate. A person is not required to be completely retired to receive retirement benefits. A person is considered “retired” if the retirement test is met.
The retirement age when unreduced benefits are available (previously age 65) increased by two months per year for workers reaching age 62 in 2000-2005. It is age 66 for workers reaching age 62 in 2006-2016. It will increase again by two months per year for workers reaching age 62 in 2017-2022. Finally, the retirement age will be age 67 for workers reaching age 62 after 2022 (i.e., reaching age 67 in 2027).
The full retirement age for spouse’s benefits (also previously age 65) moves upward in exactly the same way as that for workers. The full retirement age for widow(er)’s benefits also rises but in a slightly different manner (beginning for widow(er)s who attain age 60 in 2000 and reaching a full retirement age of 67 in 2029).
Reduced benefits will continue to be available at age 62, but the reduction factors are revised so that there is a further reduction of up to a maximum of 30% for workers entitled at age 62 after the retirement age is increased to age 67 (rather than only 20% for entitlement at age 62 under previous law).
4. Must a person file an application for retirement benefits?
Yes. A person can file an application within three months before the first month in which he becomes entitled to benefits. The earliest date for filing would be three months before the month of attaining age 62.
As evidence of age, a claimant must ordinarily submit one or more of the following: birth certificate; church record of birth or baptism; Census Bureau notification of registration of birth; hospital birth record; physician’s birth record; family Bible; naturalization record; immigration record; military record; passport; school record; vaccination record; insurance policy; labor union or fraternal record; marriage record; other evidence of probative value.
If a person is receiving Social Security disability benefits for the month before the month he reaches full retirement age, no application is required; the disability benefit ends and the retirement benefit begins automatically.
5. What is the amount of a retirement benefit?
A retirement benefit that starts at full retirement age (see Q 31) equals the worker’s Primary Insurance Amount (PIA). But a worker who elects to have benefits start before full retirement age will receive a monthly benefit equal to only a percentage of the PIA. The PIA will be reduced by 5/9 of 1% for each of the first 36 months the worker is under full retirement age when payments commence and by 5/12 of 1% for each such month in excess of 36.
As a general rule, a person taking reduced retirement benefits before full retirement age will continue to receive a reduced rate after normal retirement age.
An individual can obtain higher retirement benefits by working past full retirement age.
6. What is the first month for which a retired person receives a retirement benefit?
A monthly benefit is available to a retired worker when he reaches age 62, provided he is fully insured.
Workers and their spouses (including divorced spouses) do not receive retirement benefits for a month unless they meet the requirements for entitlement throughout the month. The major effect of this provision is to postpone, in the vast majority of cases, entitlement to retirement benefits for persons who claim benefits in the month in which they reach age 62 to the next month. Only in the case of a person who attains age 62 on the first or second day of a month can benefits be paid for the month of attainment of age 62. Note that a person attains his age on the day preceding the anniversary of his birth. For example, if an individual was born on May 2, 1951, he is considered 62 years old on May 1, 2013.
Most entitlement requirements (other than the entitlement of the worker) affecting young spouses or children of retired or disabled workers are deemed to have occurred as of the first of the month in which they occurred. However, in the case of a child who is born in or after the first month of entitlement of a retired or disabled worker, benefits are not payable for the month of birth (unless born on the first day of the month).
Retroactive benefits are usually prohibited if permanently reduced benefits (as compared with what would be payable for the month the application is filed) would occur in the initial month of eligibility. However, retroactive benefits may be applied for if: (1) with respect to widow(er)’s benefits, the application is for benefits for the month of death of the worker, if filed for in the next month, and (2) retroactive benefits for any month before attaining age 60 are applied for by a disabled widow(er) or disabled surviving divorced spouse.
7. Can a person receive retirement benefits regardless of the amount of his wealth or the amount of his retirement income?
Yes, a person is entitled to retirement benefits regardless of how wealthy he is. Also, the amount of retirement income a person receives (e.g. dividends, interest, rents, etc.) is immaterial. A person is subject to loss of benefits only because of excess earnings arising from his personal services.
8. Can a person lose retirement benefits by working?
Yes, a person can lose some or all monthly benefits if she is under the full retirement age (see Q 31) for all of 2014 and his or her earnings for the year exceed $15,480. A person may lose benefits if she reaches full retirement age in 2014 and if she earns over $41,400, but only those earnings earned before the month he or she reaches full retirement age count towards the $41,400 limit. The amount of loss depends on the amount of earnings in excess of these earnings limits. In no case will a person lose benefits for earnings earned after reaching full retirement age. For the initial year of retirement of a person who is under the full retirement age for all of 2014, the monthly earnings limit is $1,290. For purposes of this test, “earnings” include not only earnings in covered employment, but also earnings in noncovered employment in theUnited States. As to noncovered employment outside theUnited States, benefits are lost for any month before reaching full retirement age when so employed for more than 45 hours, regardless of the amount of earnings.
The dollar exempt amounts mentioned above will be increased automatically after 2014 as wage levels rise.
9. When do retirement benefits end?
At the worker’s death. No retirement benefit is paid for the month of death.
10. Can a husband and wife both receive retirement benefits?
Yes. If each is entitled to receive benefits based on his or her own earnings record, each can receive retirement benefits independently of the other’s benefits. However, a woman or man who is entitled to a retirement benefit and a spouse’s benefit cannot receive both in full.
11. Is the spouse of a retired or disabled worker entitled to benefits?
An individual is entitled to spouse’s benefits on a worker’s Social Security record if:
The worker is entitled to retirement or disability benefits; and
The individual has filed an application for spouse’s benefits; and
The spouse is not entitled to a retirement or disability benefit based on a primary insurance amount equal to or larger than one-half of the worker’s primary insurance amount; and
The spouse is either age 62 or over, or has in their care a child under age 16, or disabled, who is entitled to benefits on the worker’s Social Security record.
The spouse of a worker must also meet one of the following conditions: (1) the spouse must have been married to the worker for at least one year just before filing an application for benefits; (2) the spouse must be the natural mother or father of the worker’s biological child; (3) the spouse was entitled or potentially entitled to spouse’s, widow(er)’s, parent’s, or childhood disability benefits in the month before the month of marriage to the worker; or (4) the spouse was entitled or potentially entitled to a widow(er)’s, parent’s, or child’s (over 18) annuity under the Railroad Retirement Act in the month before the month of marriage to the worker. A spouse is “potentially entitled” if he or she meets all the requirements for entitlement other than the filing of an application and attaining the required age.
12. What is meant by having a child “in care”?
Having a child in care is a basic requirement for spouse’s benefits when the spouse is under age 62 and for mother’s and father’s benefits. “In care” means that the mother or father: (1) exercises parental control and responsibility for the welfare and care of a child under age 16 or mentally incompetent child age 16 or over, or (2) performs personal services for a disabled mentally competent child age 16 or over.
13. Is the divorced spouse of a retired or disabled worker entitled to a spouse’s benefits?
The spouse is entitled to a divorced spouse’s benefit on the worker’s Social Security record if: (1) the worker is entitled to retirement or disability benefits, (2) the spouse has filed an application for divorced spouse’s benefits, (3) the spouse is not entitled to a retirement or disability benefit based on a primary insurance amount that equals or exceeds one-half the worker’s primary insurance amount, (4) the spouse is age 62 or over, (5) the spouse is not married, and (6) the spouse was married to the worker for at least 10 years before the date the divorce became final.
A divorced spouse who is age 62 or over and who has been divorced for at least two years is able to receive benefits based on the earnings of a former spouse who is eligible for retirement benefits, regardless of whether the former spouse has retired or applied for benefits. This two-year waiting period for independent entitlement to divorced spouse’s benefits is waived if the worker was entitled to benefits prior to the divorce. A spouse whose divorce took place after the couple had begun to receive retirement benefits, and whose former spouse (the worker) returned to work after the divorce (thus causing a suspension of benefits), will not lose benefits on which he or she had come to depend.
14. What is the amount of a spouse’s benefit?
If the spouse of a retired or disabled worker is caring for the worker’s child under age 16 or disabled child, the monthly benefit equals half of the worker’s PIA, regardless of his age. If the spouse is not caring for a child, monthly benefits starting at full retirement age likewise equal half of the worker’s PIA; but if the spouse chooses to start receiving benefits at or after age 62, but before full retirement age, the benefit is reduced.
If the spouse chooses to receive, and is paid, a reduced spouse’s benefit for months before full retirement age, the spouse is not entitled to the full spouse’s benefit rate upon reaching full retirement age. A reduced benefit rate is payable for as long as the spouse remains entitled to spouse’s benefits.
A spouse will not always receive a spouse’s full benefit; under the following circumstances a spouse will receive a smaller amount:
(1) If the total amount of monthly benefits payable on the worker’s Social Security account exceeds the Maximum Family Benefit, all benefits (except the worker’s benefit) will be reduced proportionately to bring the total within the family maximum limit.
(2) If a spouse who is not caring for a child elects to start receiving a spouse’s benefit at age 62 (or at any time between age 62 and full retirement age), the benefit will be reduced by 25/36 of 1% for each of the first 36 months that the spouse is under full retirement age when benefits commence, and by 5/12 of 1% for each such month in excess of 36.
(3) If the spouse is entitled to a retirement or disability benefit that is smaller than the spouse’s benefit rate, the spouse will receive a spouse’s benefit equal to only the difference between the retirement or disability benefit and the full spouse’s benefit rate.
(4) The amount of a spouse’s monthly benefit is usually reduced if the spouse receives a pension based on his or her own work for a federal, state, or local government that is not covered by Social Security on the last day of such employment. However, the Social Security Protection Act of 2004 generally requires that a person work in a situation covered by Social Security for five years to be exempt from this Government Pension Offset (GPO).
If a spouse is entitled to a retirement or disability benefit that is larger than the spouse’s benefit rate, he or she will receive only the retirement or disability benefit.
15. What is the amount of a divorced spouse’s benefit?
The amount of a divorced spouse’s benefit is the same as a spouse’s benefit amount. As a general rule, it will equal half of the beneficiary’s former spouse’s PIA and will be reduced if he or she elects to start receiving benefits before normal retirement age. However, a divorced spouse’s benefit is paid independently of other family benefits. In other words, it will not be subject to reduction because of the family maximum limit, and will not be taken into account in figuring the maximum limit for the former spouse’s family.
16. Must a spouse be dependent upon the worker for support to be eligible for a spouse’s benefits?
No, a spouse is entitled to benefits if the worker is receiving benefits and the spouse is otherwise qualified. A spouse need not be dependent upon the worker, and may be independently wealthy.
17. May a spouse lose benefits if the worker works or if the spouse works?
Yes, a spouse can lose some or all of his or her monthly benefits if the worker is under the full retirement age for the entire year and earnings exceed $15,480 (in 2014). A spouse may also lose benefits in the year the worker reaches full retirement age if the worker earns over $41,400 (in 2014), but only earnings earned before the month the worker reaches full retirement age count towards the $41,400 limit. Similarly, if the spouse is under full retirement age for the entire year and has earnings of over $15,480 (or earnings of over $41,400 in the year that full retirement age is attained), some or all benefits can be lost.
When both the worker and the spouse have earnings in excess of the earnings limitation: (1) 50% of the worker’s “excess” earnings are charged against the total monthly family benefits if the worker is under the full retirement age, and 33⅓% in the year the worker is to reach the full retirement age, and then (2) the spouse’s “excess” earnings are charged against his or her own benefits in the same manner, depending upon the age of the spouse, but only to the extent that those benefits have not already been charged with the worker’s excess earnings. Example. Mr. Smith, age 62 on January 1, 2014, is entitled to a monthly retirement benefit of $346, and his wife, also age 62 on January 1, 2014, is entitled to a monthly spouse’s benefit of $162. Mr. Smith had earnings that were $4,064 in excess of the earnings limitation. His wife had earnings that were $1,620 in excess of the earnings limitation. Mr. Smith’s earnings are charged against the total monthly family benefit of $508 ($346 + $162), so neither Mr. Smith nor his wife receives payments for January through April (50% of $4,064 = $2,032, and 4 × $508 = $2,032). The wife’s excess earnings are charged only against her own benefit of $162. As her benefits for January through April were charged with the worker’s excess earnings, the charging of her own earnings cannot begin until May; she thus receives no benefits for May through September (50% of $1,620 = $810, and 5 × $162 = $810). Exception. The excess earnings of the worker do not cause deductions from the benefits of an entitled divorced spouse who has been divorced from the worker at least two years or whose former spouse was entitled to benefits before the divorce.
18. When does a spouse’s benefit end?
A spouse’s benefits end when: (1) the spouse dies; (2) the worker dies (in this case, the spouse will be entitled to widow(er)’s, mother’s, or father’s benefits); (3) the worker’s entitlement to disability benefits ends and he or she is not entitled to retirement benefits (unless the divorced spouse meets the requirements for an independently entitled divorced spouse); (4) the spouse is under age 62 and there is no longer a child of the worker under 16 or disabled who is entitled to child’s benefits; (5) the spouse becomes entitled to retirement or disability benefits and his or her PIA is equal to or larger than one-half of the worker’s PIA; (6) the spouse and the worker are divorced before the spouse reaches age 62 and before the spouse and worker had been married for 10 years; or (7) the divorced spouse marries someone other than the worker. However, the divorced spouse’s benefit will not be terminated by marriage to an individual entitled to widow(er)’s, mother’s, father’s or parent’s monthly benefits, or to an individual age 18 or over who is entitled to childhood disability benefits.
A spouse is not entitled to a spouse’s benefit for the month in which any of the above events occurs. The last payment will be the payment for the preceding month.
19. Will a spouse’s benefit be reduced if the spouse is receiving a government pension?
Social Security benefits payable to spouses – including surviving spouses and divorced spouses – are reduced (but not below zero) by two-thirds of the amount of any governmental (federal, state, or local) retirement benefit payable to the spouse based on his or her own earnings in employment not covered by Social Security, if that person’s last day of employment was not covered by Social Security (but see below for SSPA 2004). Thus, for the affected group, the spouse’s benefit is reduced $2 for every $3 of the government pension.
The Social Security Protection Act of 2004 (SSPA 2004) requires a person to work in covered employment for the last 60 months (instead of one day) of employment to be exempt from the government pension offset (GPO). This change will not apply to someone whose last day of government service was beforeJuly 1, 2004. Also, the required 60 months will be reduced for each month of government service that was covered by Social Security before the enactment of SSPA 2004. These reduced months of service must be performed after enactment.
This offset against Social Security benefits did not apply prior to December 1977, or if the individual: (1) met all the requirements for entitlement to Social Security benefits that existed and were applied in January 1977, and (2) received or was eligible to receive a government pension between December 1977 and December 1982. In addition, it does not apply to those first eligible to receive a government pension prior to July 1983 if they also meet the one-half support test.
Generally, federal workers hired before 1984 are part of the Civil Service Retirement System (CSRS) and are not covered by Social Security. Most Federal workers hired after 1983 are covered by the Federal Employees’ Retirement System Act of 1986 (FERS), which includes coverage by Social Security. The FERS law provided that employees covered by the CSRS could, from July 1, 1987 to December 31, 1987, make a one-time election to join FERS (and thereby obtain Social Security coverage). Thus, a CSRS employee who switched to FERS during this period immediately became exempt from the government pension offset. Also, an employee who elected FERS on or before December 31, 1987is exempt from the government pension offset, even if that person retired from government service before his FERS coverage became effective.
However, federal employees who elect to become covered under FERS during any election period which may occur on or afterJanuary 1, 1988, are exempt from the government pension offset only if they have five or more years of federal employment covered by Social Security after January 1, 1988. This rule also applies to certain legislative branch employees who first become covered under FERS on or afterJanuary 1, 1988. Pensions based wholly on service performed as a member of a uniformed service, whether on active or inactive duty, are excluded from the offset.
20. What is the best time to file for Social Security retirement benefits?
The decision on when to apply for Social Security retirement benefits depends on a number of factors. Taking benefits early (before full retirement age) will result in a permanent reduction of benefits. Taking retirement benefits later will result in a high benefit amount, but a shorter life may result in lower total benefits. The Social Security Administration provides a Retirement Planner on its website which includes a number of calculators to help a person determine the right time to file for benefits and the effect on benefits of filing early or late.
However, the federal government does allow an individual a “re-do” if he or she decides that the application for retirement benefits was made too early. By filing Form 521, an individual can request that the original application for retirement benefits be withdrawn and a new application date be substituted. The catch is that the individual must pay back all retirements benefits received up to the date of the withdrawal. However the federal government does not charge a penalty or interest for filing a Form 521, but the individual must have the cash to repay the federal government.
Another consideration on for when to take retirement benefits is how much income will be earned in the year for which benefits are applied. Too much earned income will result in a loss of benefits .
Additionally, since Social Security benefits may be subject to income taxation the individual’s income and tax situation should be considered.
21. When should a person file for retirement benefits?
A person should get in touch with a Social Security office two or three months before reaching age 62. The Social Security office will furnish the information needed to decide whether or not to file an application for retirement benefits at that time. Because of the rules regarding retroactive benefits, a person should consider filing for benefits on January 1 of the year that he or she attains Full Retirement Age (FRA).
If a worker does not file an application, he should contact the Social Security office again: (1) two or three months before retirement; (2) as soon as the worker knows that he will neither earn more than the monthly exempt amount in wages nor render substantial services in self-employment in one or more months of the year, regardless of expected total annual earnings; or (3) two or three months before the worker reaches FRA, even if still working.
It may be advantageous to delay filing an application for benefits where: (1) the person is under the FRA and wishes to wait and receive an unreduced benefit at FRA, (2) the person is at the FRA but benefits are not payable because of earnings (application at or near retirement may provide higher benefits in the year of retirement), or (3) the person would lose benefits payable under some other program.
22. If age 62 is the computation age, is there any advantage to waiting until normal retirement age to collect benefits?
Yes, the full PIA is payable at full retirement age, with a reduced amount paid in case of an earlier retirement age. Age 62 is used to determine elapsed years but earnings are counted to full retirement age. Thus, early retirement usually affects the benefit in two ways. The PIA usually will be smaller (because fewer years of possibly higher earnings will be used in computing the AIME), and the lower PIA will be subject to reduction (5/9 of 1% per month for the first 36 months under the full retirement age and 5/12 of 1% per month for any additional months under the full retirement age).
23. Can a person obtain higher retirement benefits by working past retirement age?
Yes, in two ways.
First, workers who continue on the job receive an increase in retirement benefits for each year they work between full retirement age and 70. Note that this is not an increase in the worker’s PIA. Other benefits based on the PIA, such as those payable to a spouse, are not affected.
This delayed retirement credit is also payable to a worker’s surviving spouse receiving a widow(er)’s benefit.
Beginning in 1990, the delayed retirement credit payable to workers who attain age 62 after 1986 and who delay retirement past the full retirement age, the full-benefit age (gradually rising from age 65 to age 67) is gradually increased. The delayed retirement credit is increased by one-half of 1% every other year until reaching 8% per year in 2009 or later. The higher delayed retirement credits are based on the year of attaining age 62 and are payable only at and after full retirement age.
Delayed Retirement Credit Rates
Attain Age 62
Monthly Percentage
Yearly Percentage
1979-1986
1/4 of 1%
3%
1987-1988
7/24 of 1%
3.50%
1989-1990
1/3 of 1%
4%
1991-1992
3/8 of 1%
4.50%
1993-1994
5/12 of 1%
5%
1995-1996
11/24 of 1%
5.50%
1997-1998
1/2 of 1%
6%
1999-2000
13/24 of 1%
6.50%
2001-2002
7/12 of 1%
7%
2003-2004
5/8 of 1%
7.50%
2005 or after
2/3 of 1%
8%
Workers, who became age 65 before 1990 (and after 1981) and continued on the job, received an increase in retirement benefits usually equal to 3% for each year (1/12 of 3% for each month) they worked between age 65 and 70. (The factor was only 1% for workers who became age 65 before 1982.)
Second, working past the full retirement age frequently results in a higher AIME. The reason: In figuring the number of years to be used in the computation, the year in which the person reaches age 62 and succeeding years are not counted. But those years can be selected as years of highest earnings.
24. Will the retirement age at which unreduced benefits are available ever be increased?
Yes, the Social Security Amendments of 1983 increased the full retirement age (the age at which unreduced benefits are available), by two months per year for workers reaching age 62 in 2000-2005 – to age 66; maintained age 66 for workers reaching age 62 in 2006-2016; increased by two months a year the retirement age for workers reaching age 62 in 2017-2022; and maintained age 67 for workers reaching age 62 after 2022. It does not change the age of eligibility for Medicare.
The 1983 amendments do not change the availability of reduced benefits at 62 (60 for widow(er)s), but revise the reduction factors so that there is a further reduction (up to a maximum of 30% for workers entitled at age 62 after the full retirement age is increased to age 67, rather than only up to 20% for entitlement at age 62 under prior rules). There is no increase in the maximum reduction in the case of widow(er)s, but some increases in the reduction occur at ages over 60 and under full retirement age.
Effects of Retirement-Age Provision in Social Security Amendments of 1983*
Year of Birth
Attainment of Age 62
Full Retirement Age (Year/Months)
Date of Attainment of Full Retirement Age1
Age-62 Benefit as Percent of PIA2
1938
2000
65/2
March 1, 2003
79.2
1939
2001
65/4
May 1, 2004
78.3
1940
2002
65/6
July 1, 2005
77.5
1941
2003
65/8
September 1, 2006
76.7
1942
2004
65/10
November 1, 2007
75.8
1943-1954
2005-2016
66/0
January 1, 2009-2020
75.0
1955
2017
66/2
March 1, 2021
74.2
1956
2018
66/4
May 1, 2022
73.3
1957
2019
66/6
July 1, 2023
72.5
1958
2020
66/8
September 1, 2024
71.7
1959
2021
66/10
November 1, 2025
70.8
1960 and after
2022 and after
67/0
January 1, 2027 and after
70.0
* Full retirement age is for worker and spouse benefits only. Full retirement age for widow(er)s is based on attainment of age 60 in 2000 or later, so that Full retirement age is age 67 beginning 2029.
1 Birth date assumed to be January 2 of year (for benefit-entitlement purposes, the Social Security Administration considers a person to reach a given age on the day before the anniversary of his birth, thus, someone born on the 1st of the month is considered to reach a given age on the last day of the previous month). For later months of birth, add number of months elapsing after January up to birth month.
2 Applies present-law reduction factor (5/9 of 1 percent per month) for the first 36 months' receipt of early retirement benefits and new reduction factor of 5/12 of 1 percent per month for additional months.
The content in this article is not intended or written to be used, and it cannot be used, for the purposes of avoiding U.S. tax penalties.
All materials on this site are copyrighted by the National Underwriter Company. Distribution of these copyrighted materials to those who have not purchased the book is prohibited.
The above article was drawn from 2014 Social Security & Medicare Facts, and originally published by The National Underwriter Company, a Summit Professional Networks business as well as a sister division of LifeHealthPro.
1. Choose a date How much a retiree receives each month varies greatly depending on what age Social Security benefits start. The longer one waits, up to age 70, the larger each check will be. The agency says that as a general rule, the total benefits a person receives will be the same no matter what age benefits begin. 2. Partners count If a husband or wife applies for benefits, the partner might be eligible for spousal benefits even if he or she never worked a job under Social Security. The rules are complicated, but in some circumstances a couple can draw more money than if each drew their own benefits. It’s worth checking out. 3. Watch out for the taxman
George Harrison and The Beatles captured everyone’s disdain for the taxman. Those monthly benefits checks can be subject to taxes. For a couple, taxes are paid on half your Social Security benefits if reported income is between $32,000 and $44,000. Tax is paid on 85 percent of benefits above $44,000. 4. The return of the ex
This might not be the most welcome news, but a divorced spouse is entitled to benefits if a few conditions are met: he or she is unmarried, at least 62 and those benefits would be more than the person’s own Social Security payments. 5. There are limits If you start collecting benefits before your full retirement age, you might see a reduction in your monthly check if you reach certain earning limits. For this year, the earnings limit is $15,120. A dollar for every $2 you make over the limit will be deducted from your benefits. The earnings limit rises to $15,480 next year. 6. The kids are alright Children of those who qualify for benefits may be entitled to receive payments. To be eligible they must be: unmarried and under 18; or be 18 or 19 and be a fulltime student no higher than 12th grade; or be 18 or older and suffering from a disability that began before age 22. The payments do not reduce the primary Social Security beneficiary’s retirement benefit.
Year-end tax tips for retirees (and those about to be)
Rodney Brooks, USA TODAY 8:49 a.m. EST November 5, 2013
It seems to come faster each year. It's time to begin thinking about your taxes.
What you've done during the year can be pretty important come April. But the implications for people in retirement and those planning for retirement can be huge.
"Managing taxes year-to-year is a great way for retirees to save money in retirement and thereby increase their income throughout retirement," says Jonathan Clements, director of financial education at Citi Personal Wealth Management.
With a good financial adviser, tax planning should be a year-round process, if it's to be effective, not a last-minute rush. But we'll still offer a list of year-end tax strategies. To start, Clements offers five "smaller things you should think about."
1. Minimum distribution.If you are 70½ or older, you must take a minimum distribution from your IRA. Not doing so could result in big penalties. You can delay it until March. But that could cause another problem: You'll still have to take another distribution that year. Don't wait, he says. Take the distribution this year. 2. Take advantage of the catch-up. If you're 50 or older, you're allowed to make additional "catch-up" contributions to your IRA or 401(k). That means once you reach the maximum contribution, you can put an additional $1,000 into your IRA and an additional $5,500 into your 401(k). Making catch-up contributions to a traditional IRA or a 401(k) reduces your taxable income, and therefore, your taxes. 3. Begin to limit the number of accounts. "If you are approaching retirement or in retirement, you should look to simplify your finances," Clements says. "As you get older, you may struggle to keep up with all those accounts. If you narrow it down to one or two, you make easier for yourself, and you make it easier for your heirs." 4. Utilize the gift-tax exclusion. "If you have more (money) than you need, take advantage of the $14,000 gift tax exclusion," he says. "Giving money away is the easiest way to shrink your taxable estate." 5. Beware of risk. "A big decline in the market will be a bigger issue for you," Clements says. Also, particularly after this year, stocks may be worth more, and you may have far more in (capital gains) taxes than you intended.
"One of the great things about being retired is you have a lot of control over your tax bill," Clements says. You can decide how big your tax bill will be. "Take a large amount out of your IRA, or take less. Sell that mutual fund this year or next. One way you can have more income over time is to be careful about when you realize taxable income."
For example, he says, one mistake people make is having a year with no taxable income, odd as that sounds. "You just retired, you are 63, haven't claimed Social Security and have not taken money out of an IRA," he says. You live off your ordinary savings. "You could end up with no taxable income for that year. That would be a terrible, terrible waste. You are missing a chance to get money out of an IRA or sell mutual funds and have a low tax rate."
You could convert a regular IRA to a Roth IRA, says Chris McIntire, president of McIntire Retirement Services in Perrysburg, Ohio. "I had a client who could convert $20,000 from his IRA to a Roth, and that still kept him in the 10% federal tax bracket."
Other tax-saving suggestions:
• Roth conversions. "We encourage people to do Roth conversions before they start Social Security," McIntire says. "People who have large IRAs may want to. If they are in a 15% tax bracket, they can pay taxes at known rates as opposed to unknown rates (later in retirement)."
Converting to a Roth makes sense for a number of reasons, says Charles Massimo, CEO of CJM Wealth Management in Long Island, N.Y. "There are no minimum distributions. It is a tax-free distribution. A regular IRA is taxed at the ordinary income rate."
• Consider tax-advantaged mutual funds, says Massimo. "Understand the difference between tax-advantaged mutual funds, vs. non-tax advantaged. Non-tax advantaged owners would pay higher taxes. They are probably paying 20% to 30% more in taxes a year if they own a non-tax advantaged fund."
• Sell losers. Some people still have big losses carried forward from the 2007-2009 bear market. "With the tremendous performance of the stock market, this could be a good year to offset some of those capital gains with capital losses," says McIntire.
• Harvest gains. "If they are in the 10% or 15% income bracket, the capital gains could be 0%," he says. "Harvest some of those gains as we get late in the season, and minimize capital gains taxes."
• Switch to an index fund, says McIntire. "You have a mutual fund where a manager does a lot of trading. He may be rebalancing for next year. That would cause capital gains distributions that some people may not want."
• Draw down your IRA before you have to take the minimum distribution at 70½, says Clements. If people wait, he says, "because they are making a large required distribution, it triggers taxes on your Social Security." From 50% to 85% of your Social Security income can be taxable, depending on income, says Clements. "One way retirees can save on taxes is draw down IRAs before they reach 70½. People refer to it as 'tax torpedo.' "
"There are so many ways retirees can save on taxes, using income from a portfolio," says Massimo. "The key is a financial adviser who knows how to do that for them."
BOSTON -- There's plenty to consider when you contemplate where to live in retirement. Will family and friends be nearby? Does the weather suit you? What sort of activities are there? And especially high on the list of factors to consider are taxes -- one of life's two certainties and one of the largest expenses people face in retirement.
Is the state that you have designs on retiring to tax friendly or not? And the basic questions to answer are these: How does the state tax your income? How does it tax your property and your consumption? And what's the overall tax burden?
As some know, older Americans tend to generate income from several sources in retirement, including income from wages or self-employment; Social Security; pensions; and personal assets, including taxable and tax-deferred accounts. Taxes on those sources of income, in essence, mean less money in your pocket for your golden years. So before moving to this or that state, you'll need to figure out whether and how the state taxes your various sources of income.
You will also need to consider taxes on the other side of the ledger, including state and local property taxes, state and local sales and use taxes. If you live large, you might pay plenty in property taxes and sales taxes.
And, then you'll need to calculate what your overall personal tax burden will be. It's a taxing exercise to be sure.
Thankfully, CCH, a Wolters Kluwer company, has created several charts and tables that look at how states tax income, sales and other transactions, including retirement income. We've culled from that list -- with the help of Kathleen Thies, a state tax analyst for CCH -- the top income-tax friendly states for retirees, states that don't tax income, including Social Security and pension income. And then we added some commentary from the Tax Foundation about other taxes, such as property and sales, and the overall tax burden, in those income-tax friendly states.
Of course, before moving to one of these income-tax friendly states, be sure to calculate your personal overall tax burden given all your actual and likely sources of income, given your spending patterns, and given your actual or desired standard of living.
Remember, what you save on income taxes in one state you might pay in property taxes or sales taxes. And vice versa. What you save on property and sales taxes in one state you might pay in income taxes. "There are no free lunches so you need to be savvy about what your particular needs are in retirement," said Thies.
One more note, for those who itemize deductions, there are five types of deductible non-business taxes, including state, local and foreign income taxes; state, local and foreign real estate taxes; state, and local personal property taxes; state and local sales taxes, and qualified motor vehicle taxes.
In other words, to calculate your overall personal tax burden, you'll have to figure out whether you can take advantage of these deductions.
That said, here's a closer look at the states that are -- if nothing else -- the friendliest for income tax purposes, and, in some cases, fairly friendly from an overall tax burden, based on CCH and the Tax Foundation research. The states are listed in order of tax friendliness from an overall tax burden point of view, as measured by the Tax Foundation.
1. Alaska:Alaska might not seem like a retirement haven based on the usual factors considered such as, say, weather. But it might be the perfect place for one's golden years if taxes are a big concern. Alaska doesn't tax personal income, including Social Security benefits and pension income. And, there's no state-imposed sales tax. This is not to say that you won't pay any taxes in Alaska. Instead, it means that you'll pay other types of taxes, such as property taxes. 2. Nevada: Many retirees rely on income from several sources to make ends meet these days. If you fall into that camp, Nevada might be the place for you. This state doesn't tax income, Social Security benefits or pension income. And its property taxes are reasonable, too. Its sales tax, however, is higher than the national average. 3. South Dakota: It might not be the first or even the second state that you think of when contemplating where to live in retirement. But South Dakota is nothing if not a tax friendly state. The state doesn't tax individual income, Social Security benefits or pension income. And the overall tax burden is among the lowest in the nation. 4. Wyoming: There's no individual income tax on Social Security benefits or pension income in Wyoming, according to CCH. But that's not to say you won't have to pay any taxes in Wyoming. Property taxes and sales taxes tend to be higher than the national average. 5. Texas: In Texas, there's no individual income tax. But property and sales taxes tend to be higher than the rest of the nation. 6. Florida: There are plenty of reasons why people choose to retire to the Sunshine state, the low tax burden being among those reasons. There's no individual income tax on Social Security benefits or pension income. There are pipers to pay, however, in the forms of property and sales taxes. 7. Washington: Another state not generally viewed as a traditional retirement haven is, however, income tax friendly for retirees. There's no individual income tax on Social Security benefits or pension income. But if you plan on spending lots money while in retirement, Washington might not be your first choice. It has a relatively high sales tax.
DISCLAIMER: No advice, recommendation or solicitation is intended with these posts. Postings here are just topics for discussion. Any investment must be thoroughly researched by you and must be considered in light of your particular circumstances including your current and future obligations, income, stability of income, existing assets, risk tolerance, family situation, age, health, and financial goals. If you need help determining suitability, then please ask
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