The Social Security first year of retirement rule lets people exclude from Social Security’s annual earned income limit any pre-retirement wages they earn in the calendar year they start receiving Social Security retirement checks. This helps new retirees avoid the penalty for exceeding the annual earned income limit.
Collecting a Social Security retirement benefit while working? You could be penalized.
You can collect Social Security retirement benefits and still have a job, but there are limits on what you can earn before a penalty kicks in.
Are still employed when you begin taking Social Security retirement benefits and earn more than $21,240 annually from work.
For many new retirees, that income limit seems to introduce a problem: If you begin taking Social Security retirement benefits midyear, what happens if you make more than the limit while you’re still working? Would your benefit checks suffer through your first year of retirement?
No. That’s where Social Security’s first-year rule comes in. If you earn income in the months before you start collecting Social Security, it doesn’t count toward your annual earned income limit.
For the remainder of that first year of retirement, you do face a monthly earnings limit, rather than an annual limit. The annual limit applies in the subsequent year.
How the Social Security first year of retirement rule works
Unless you retire on Jan. 1 of any given year, you’ll probably earn income during the calendar year in which you retire. The later in the year you retire, the more you’ll earn from your job, assuming your earnings are relatively consistent.
For example, say you retire on July 1. You’ll have earned six months of income in the year by the time your Social Security benefit begins. If your annual salary is over $42,480, you’d likely breach the $21,240 limit if you retire more than halfway through the year.
The Social Security first year of retirement rule addresses this timing issue.
If you retire before your full retirement age, the only income that counts toward the limit is the income you earn in the months after you retire. So if you retire on June 30, for example, you only need to worry about earnings in July and after.
Instead of an annual limit in your first year, you’ll face a monthly limit of $1,770. That amount equals the monthly average of the annual limit.
If you exceed that limit in any given month, you won’t receive a Social Security benefit that month. In other words, if you go $1 over the limit, you lose your check, whatever the amount. This is different from the penalty in subsequent years, which equals half of your earnings above the limit.
After your first “year” of retirement, you move to the annual limit. Note that this refers to a calendar year, which may not equal a full 12 months of retirement.
Full retirement age – Social Security
What happens if you work beyond your first year of retirement
The rules change after the end of your first year of collecting a Social Security retirement benefit.
If you haven’t reached full retirement age
If you earn more than the annual allowable limit, which is $21,240 in 2023, Social Security reduces your benefit.
If you’re self-employed, only your net profits count toward the limit.
Your Social Security check is reduced by $1 for every $2 of earnings above the limit. For example, if your job earnings are $500 over the limit, your Social Security benefit drops by $250.
The year you reach full retirement age
The Social Security Administration reduces your benefit by $1 for every $3 of earnings above $56,520 in the year in which you reach full retirement age. So in this scenario, if your job earnings are $500 over the limit, your Social Security benefit drops by about $167.
Your benefit increases when you reach full retirement age to account for any withheld benefits. Social Security gives the example of a person who turns 62 and receives $910 per month. If that person has 12 months of benefits withheld because of earnings above the limit, they would receive $975 per month in today’s dollars once they turn 67.
If you are past full retirement age
The earnings limits and benefit reductions end in the month in which you reach your full retirement age.
This means that working or running your own business won’t reduce your benefits, no matter how much you earn.
These rules only apply to income earned through work. Retirement distributions from a 401(k) or IRA, for example, do not count toward the limit. Income from pensions, other government benefits and capital gains also don’t count.
Advantages and disadvantages of working while collecting Social Security
The disadvantage to working in retirement is that your Social Security benefit could be reduced if you earn more than the limit. But that doesn’t mean that working in retirement never makes sense. Reasons that working can make sense, even if you face a penalty, include:
It might be your best financial option. Maybe an unexpected retirement expense pops up after you begin collecting. If you need extra cash and you don’t have enough savings to cover it, working may be the best option, even if there’s a cost. You wouldn’t be alone: Nearly 1 in 3 retirees in 2023 are employed, according to research by the Employee Benefit Research Institute.
Going slightly over the limit isn’t disastrous. Say you find a job that pays $2,000 per month, or $24,000 per year. In that case, you’d be $230 over the limit per month ($2,760 per year), leading to a $115-per-month reduction in Social Security benefits. You might not want to lose that amount, but it doesn’t wash out the $2,000 you’ve earned. On the other hand, if you earn $60,000 annually, your penalty would be $1,615 per month.
Working with a penalty might be necessary if you want to keep a job into your penalty-free years. You may want or need to work after you reach your full retirement age. If you already have the position you want, staying put rather than leaving and hoping you’ll be hired back later may be your best move.
Your benefit may grow. The amount of Social Security you receive is determined in part by your highest years of earnings. If the amount you earn in one year while collecting Social Security is among your highest-earning years, the Social Security Administration may increase your benefit.
What types of income count against the income limit?
How much can you earn and not be penalized?
I’m already collecting Social Security, and my earnings this year are going to be significantly different from the amount I reported to Social Security. What should I do?