Maximize Social Security Benefits When You Retire

Posted by Kim Chen on February 10th, 2015

Get the most from Social Security. Younger retirees face a harsh penalty for working part-time. For every $2 earned over $15,720 in 2015, you lose $1 in Social Security benefits (up from $15,480 in 2014). In the year you reach full retirement age, a higher earnings threshold applies. Your benefits will be reduced by $1 for every $3 of earnings only when earnings exceed $41,880 in 2015 if you reach full retirement age (up from $41,400 in 2014).

After you reach full retirement age, you can earn unlimited amounts and still qualify for full Social Security benefits. (See the right-hand chart to determine what “full retirement age” means for you.)

However, that’s only earned income. You can have unlimited unearned income from sources like retirement plans, pensions, annuities, interest, dividends and capital gains without losing any Social Security benefits.

This “Social Security Earnings Test” only applies to people below the normal retirement age.

With some advance planning, you might be able to reduce earned income and make up the shortfall with unearned income with a deferred compensation plan. That is, you receive money that you earn one year in a later year, perhaps in retirement.

For income tax purposes, taxes are due when money is received. For Social Security purposes, though, deferred compensation is counted when it’s earned — not when it’s received. So any money you receive from a deferred compensation plan while you’re between age 62 and your full retirement age doesn’t count against Social Security retirement benefits. In other words, you can defer compensation from ages 55 to 61 and receive that money while you’re between 62 and full retirement age.

To do this, the details of your deferred compensation plan should be recorded in the corporate minutes for your company if you’re an owner or part owner. You should also include the appropriate reasons. For example, “the company needs cash now, for expansion purposes, so current compensation is being deferred.”

Then, when you decide to semi-retire, you can work just enough to earn the allowable amount for that year. (The 2015 allowed amount of $15,720 will generally increase annually.) This way, you receive full benefits from Social Security.

In addition to Social Security and deferred compensation, your income can be supplemented by retirement plan payouts and perhaps the sale of company stock shares to your company. You may also have an expense account that can be used as a part-time employee to help offset expenses.

All of these methods help preserve your Social Security benefits and retirement dollars. Your tax adviser can provide more information.
© 2015 Thomson Reuters/Tax & Accounting