I’m turning 70 and about to start collecting Social Security, even though I’m still working and intend to keep working for a couple more years. Since I’m past full retirement age, will I continue to pay Social Security taxes? Also, will continuing to work affect my monthly benefit?
– A Reader
First, congratulations on waiting until 70 to collect your Social Security benefits. By doing so, you maximized your monthly payout. That’s a smart move for many folks!
But while Uncle Sam gives you a bonus for waiting to collect Social Security benefits, he doesn’t give you a dispensation from paying Social Security taxes. As long as you have earned income (such as wages), you’re required to pay Social Security taxes on up to the annual payroll limitation amount — $128,400 in 2018, going up to $132,900 in 2019. So, yes, if you continue to work, you’ll continue to pay into Social Security and other payroll taxes. Fortunately for you, since you’re past your full retirement age, there’s no benefit reduction based on income (however, earned income will likely impact your benefit if you take Social Security before your FRA). You’re entitled to full benefits no matter your income level.
However, whether or not your continued income has a positive effect on the amount of your monthly Social Security benefit depends on how much money you made in the past and how much you’re making now. Here’s why:
Benefits are based on your 35 highest-earning years
The actual calculation to determine your Social Security monthly benefit is rather complex, but basically, it is determined by your 35 highest-earning years, adjusted for inflation — up to the maximum taxable amount each year.
This ends up putting a cap on the maximum monthly benefit anyone can receive. The monthly max at FRA in 2018 is $2,788, going up to $2,861 in 2019. Then, of course, if you wait to collect beyond your FRA, you earn delayed retirement credits, up to age 70, which will increase your monthly payment.
Continuing to work could increase your benefits
So will your monthly benefit go up if you continue to have earned income? That might be the case if your current salary is higher than one of your 35 highest-earning years to date. Here are a couple of examples.
First, let’s say that you earned the maximum taxable income (or more) each of those 35 years. If so, you’re already entitled to the maximum benefit. So while there may be a lot of other positive reasons for continuing to work, it won’t get you a higher monthly Social Security payment.
But now, let’s say you earned less in the early part of your career and earnings in one or more of those years were lower than the maximum annual taxable income. If what you’re earning now is higher than what you earned in one of your past 35 highest-earning years, your current higher income will replace one of the lower-earning years.
Since Social Security benefits are recalculated yearly, this added income could result in a higher monthly payment. You may not see the difference immediately, but eventually, you will receive the added amount — sometimes, in the form of a supplemental lump sum followed by a monthly increase.
Taxes and Medicare premium concerns
This all sounds like good news so far, but you should also be aware that continuing to work past 70 could cost you a bit more in taxes and Medicare premiums.
• Required minimum distributions increase your taxable income. If you have traditional retirement accounts, at age 70 1/2, you must take an RMD. This is considered ordinary income and could possibly push you into a higher tax bracket, especially as you continue to earn other taxable income. Not only would that possibly up your income tax bill, you’d also most likely have to pay taxes on your Social Security benefits, as I describe next.
• Increased income may make your Social Security benefits taxable. The percentage of your Social Security benefits subject to income tax will depend on your annual income. If you’re a single filer in 2018 and make $25,000 to $34,000, up to 50 percent of your benefits may be taxed; for incomes over $34,000, up to 85 percent of benefits may be taxed. Limits for married filing jointly in 2018 are $32,000 to $44,000 and over $44,000, respectively.
• Higher income might mean higher Medicare Part B and D premiums. Similarly, you may be charged more for Medicare premiums if you earn over a certain amount. For 2018, those thresholds are $85,000 for single filers and $170,000 for married filing jointly. However, if you still have health care coverage through an employer, you may be able to delay taking Part B — and possibly Part D.
Check with your accountant or financial adviser
I always think it’s best to run the numbers by your accountant or other financial adviser. It’s great to be able to continue to work for many reasons. In fact, the Bureau of Labor Statistics projects the biggest annual increase in the labor force through 2024 will be in the 65 to 75 age group. But make sure you know what continuing to work at this point in life means in terms of your overall financial situation.•
Carrie Schwab-Pomerantz, Certified Financial Planner, is president of the Charles Schwab Foundation and author of “The Charles Schwab Guide to Finances After Fifty.” You can email Carrie at email@example.com. The opinions expressed in this column are those of the author.
© 2018 Charles Schwab & Co. Inc., Member SIPC
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