Social Security Q&A: Will Earning Money in Retirement Reduce My Social Security?

Welcome to a new Money Talks News feature, Social Security Q&A. You ask a Social Security question, and our expert provides the answer.

You can learn how to ask a question of your own below. And if you’d like a personalized report detailing your optimal Social Security claiming strategy, click here. (Check it out: It could result in receiving thousands more in benefits over your lifetime!)

Today’s question comes from Paul:

“I read on this website that if Social Security recipients earn over $17,040 in 2018, then their benefits are reduced. What type of income is included in that $17,040? Is it just W-2 earnings? Or, does the limit include other forms of income like interest income, capital gains and 401k withdrawals?”

Paul, the short answer is: Only earnings subject to the FICA tax are included in the $17,040 limit. Such earnings include not only those reported on W-2 forms, but also those reported as self-employment income. So, you don’t need to be concerned about interest income, capital gains and so on.

‘Twists’ in the earnings penalty

Next, let’s take a look at some interesting twists with respect to the earnings penalty.

First, the penalty applies only to those who have not reached their full retirement age (FRA). Once you reach your FRA, the penalty ends: Work all you want and still receive your full benefit check from Social Security.

Second, the penalty changes for the year in which you reach your FRA. Prior to your FRA, your benefits are reduced $1 for every $2 earned above $17,040 (in 2018). In the year you reach your FRA, the penalty is $1 for every $3 earned above $45,360.

Third — and most important — the earnings “penalty” is not like a fine for, say, speeding. When you are fined for speeding, your money is gone forever. With the earnings “penalty,” the money you lose is lost only temporarily.

Getting your Social Security money back later

Here’s an example of how you get money back after being penalized. Suppose at your full retirement age of 66, your Social Security benefit would be $2,000 a month. However, let’s say you claimed at 62, so your potential benefits would be $1,500 a month, a 25 percent reduction because you claimed early.

You continue working, earning enough so that you lose all of your Social Security benefits each year. That seems like a really stiff penalty. Yet, when you reach 66, the SSA recalculates your benefits, allowing for any earnings penalties imposed in previous years. Your recalculated benefit in this example will be $2,000, the same amount that you would have gotten had you not claimed early.

The earnings penalty temporarily cost you $72,000 over four years. But in the end your monthly benefit is increased from $1,500 to $2,000. So, you eventually get the $72,000 back, provided you live at least a normal life span.

Paul, if you want to get deeper into these weeds, you can check out this page on the SSA website.

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The questions I’m most likely to answer are those that will interest other readers. So, it’s better not to ask for super-specific advice that applies only to you.

About me

I hold a doctorate in economics from the University of Wisconsin and taught economics at the University of Delaware for many years. In 2009, I co-founded SocialSecurityChoices.com, an internet company that provides advice on Social Security claiming decisions. You can learn more about that by clicking here.

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Disclaimer: We strive to provide accurate information with regard to the subject matter covered. It is offered with the understanding that we are not offering legal, accounting, investment or other professional advice or services, and that the SSA alone makes all final determinations on your eligibility for benefits and the benefit amounts. Our advice on claiming strategies does not comprise a comprehensive financial plan. You should consult with your financial adviser regarding your individual situation.

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