The Social Security Earnings Test: Are IRA Assets Earnings?

“The Social Security Earnings Test: Are IRA Assets Earnings?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Indiana is representative of a common inquiry related to Social Security benefits. The advisor asked: My client, who is turning 62, working and wants to start collecting Social Security, was told by a Social Security Administration (SSA) representative that taking a distribution from his IRA could reduce his Social Security benefit if he retires early. Is that true and, if so, what are the details?

Highlights of the Discussion
The quick answer is, “No.” While the ability to collect Social Security benefits may be restricted based on earned income and the SSA’s “Earnings Test,” the SSA does not consider IRA distributions as earned income for this purpose. Anyone who is thinking of beginning his or her SSA retirement benefits should discuss their options with a tax and/or legal advisor.

A full discussion of the SSA Earnings Test is beyond the scope of this Case of the Week, however, in general, if a person claims Social Security retirement benefits before attaining full retirement age (between age 65 and 67, depending on year of birth), under the annual earnings reduction formula, the SSA will withhold $1 in Social Security retirement benefit for every $2 earned over the annual limit ($22,320 for 2024). In the year a person reaches full retirement age, the SSA will deduct $1 in benefits for every $3 earned above a different limit, which is $59,520 for 2024. The SSA only counts earnings up to the month before an individual reaches full retirement age, not earnings for the entire year.

According to the SSA’s website on claiming early benefits while working:

“When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you’re self-employed. We include bonuses, commissions, and vacation pay. We don’t count pensions, annuities, investment income, interest, veterans benefits, or other government or military retirement benefits.” [1]

The earnings test has been around since Social Security was initially introduced, and its purpose from the start was to preserve Social Security benefits for those who are “truly” retired, not simply to provide a windfall for individuals reaching a specific age. Once one understands the purpose of the Earnings Test, it would seem logical to assume that income that is not “earned,” such as IRA distributions, for example, would not reduce a person’s early retirement benefit.

Conclusion
Any person who would like to claim Social Security benefits before full retirement age and continue working, should carefully review how the Earnings Test works, because their Social Security benefit could be reduced due to their earned income. IRA distributions and pension withdrawals do not count as earned income for this purpose.

[1] https://www.ssa.gov/benefits/retirement/planner/whileworking.html