Social Security Archives - Retirement Learning Center

The Social Security Earnings Test: Are IRA Assets Earnings?

April 11, 2024/in Case of the Week /by jkiffmeyer

“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

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Suspending Social Security retirement benefits

February 1, 2024/in Case of the Week /by jkiffmeyer

My client who is 68 heard that he could suspend his Social Security retirement benefit and earn delayed retirement credits. Is that true and, if so, what are the details?

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 Oklahoma is representative of a common inquiry related to Social Security benefits.

Highlights of the Discussion
Suspending Social Security benefits is an important tax question for which your client should seek professional tax advice based on his personal situation. Based on guidance available on the Social Security’s website (www.ssa.gov), since your client has reached full retirement age, but is not yet age 70, it appears he can ask the Social Security Administration (SSA) to suspend his retirement benefit payments. By doing this, he will earn delayed retirement credits for each month his benefits are suspended, which will result in a higher benefit payment when he resumes them.

If your client makes the decision to suspend benefit payments after consulting with a financial advisor, he can make a request to suspend payments by calling the SSA or sending a written request. The SSA will suspend benefit payments beginning the month after an individual makes the request. If your client suspends benefit payments, they will automatically start again the month he reaches age 70—or sooner if he requests they restart prior to age 70.

There are several factors to consider when contemplating a suspension of retiree benefits, including, but not limited to, the following.

If a retiree voluntarily suspends his/her retirement benefit and he/she has others who receive benefits on their record, the others will not be able to receive benefits for the same period that the retiree’s benefits are suspended. An exception applies for divorced spouses.
If a retiree voluntarily suspends his/her retirement benefit, any benefits he/she receives on someone else’s record will also be suspended.
Medicare Part B premiums cannot be deducted from suspended benefits. Therefore, a person who suspends his/her retirement benefit will be billed for such premiums.

Conclusion
The rules related to suspending Social Security retiree benefits are complex. It is possible to earn delayed retirement credits by suspending benefits, but other issues such as the availability of family benefits and Medicare considerations may come into play when making the decision. Anyone contemplating a suspension of retiree benefits should seek expert advice from a tax and/or legal advisor.

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Railroad Retirement Benefits

June 1, 2022/in Case of the Week /by jkiffmeyer

“I have a client who participates in a pension with the railroad. Can you give me information on the arrangement?”

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 is representative of a common inquiry related to Railroad Retirement Benefits.

Highlights of the Discussion
The client is likely covered by the Railroad Retirement Act and the Railroad Unemployment Insurance Act, federal laws that provide retirement and disability benefits for qualified railroad employees and their spouses, and survivor benefits for family members. The program is governed by the Railroad Retirement Board and has been in existence since the 1930s.

Railroad Retirement Benefits are provided under a federal program parallel to the way Social Security operates for nonrailroad workers. There are several differences, however. For more information, interested parties can visit the following links online U.S. Railroad Retirement Board and An Overview of the Railroad Retirement Program.

Generally, Railroad Retirement Benefits have two tiers. Tier I was designed to be equivalent to Social Security benefits, while Tier II was structured to provide additional benefits comparable to private pension plans. And those covered by Railroad Retirement Benefits can login in here to check their benefits: https://rrb.gov/Benefits/myRRB

The form of payment is an annuity at full retirement age, which is approaching age 67 (like Social Security). Payments can start as early as age 62 with a reduction in benefit amount (also like Social Security). And if an individual has at least 30 years of service with the railroad, benefits can start at age 60 with no reduction of benefit. Annuities are payable to surviving widow(er)s, children, and certain other dependents. Lump-sum benefits are payable only in limited circumstances (i.e., after the death of a railroad employee if there are no qualified survivors of the employee, and in the case of a residual lump sum death benefit).

Railroad companies can also cover their employees with their own defined contribution or defined benefit plans. Receipt of a private railroad pension (but not a 401(k) distribution) could reduce the amount of annuity benefits payable by the Railroad Retirement Board (see Private Rail Pensions May Reduce Supplemental Annuities).

Coverage under Social Security or Railroad Retirement isn’t coverage under an employer retirement plan. Therefore, such benefits may not be rolled over to a qualified plan or IRA. Additional information on Railroad Retirement Benefits is available in IRS Publication 575, Pension and Annuity Income, and IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits .

Conclusion
Railroad employees may be eligible for unique benefits paid through the federal Railroad Retirement Board, which are similar to–but different from–benefits paid from the Social Security Administration. Railroad companies could also sponsor private qualified retirement plans for their employees. Individuals affected by Railroad Retirement Benefits should seek tax advice to help them sort out the details of how their various retirement benefits interact with each other.

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Retiree Income is Higher Than We Thought

March 12, 2021/in Blog /by jkiffmeyer

By W. Andrew Larson, CPC

Trigger warning: This blog post highlights some good and, sadly, unheralded-news about retiree income, Social Security dependence and poverty among the elderly. If good new is upsetting to you please don’t continue.

Maybe you missed it but some good retirement-related news came out recently. It seems that retiree income is actually higher than previously thought, according to a study by the Social Security Administration (SSA) . In fact, according to the information, retiree income levels where quite a bit higher than reported in other studies. In this blog we will review these findings and explore why retiree income was undercounted according to the SSA. Our source of information is the study, Improving the Measurement of Retirement Income of the Aged Population.

This ORES Working Paper No. 116 published by Irena Dushi and Brad Trenkamp came out in January 2021.Before we dig into the data, it is important to understand the entities involved with this study. As noted, the study was an “ORES” paper. ORES is the Office of Research, Evaluation and Statistics of the SSA. The paper was unique in that it compiled data from multiple sources to obtain as complete a picture of retiree income as is feasible. To date the most commonly used data on retiree income is published by the Census Bureau and is known as the Current Population Survey (CPS) Annual Social and Economic Supplement (ASEC) . The ORES study extended the retiree income exploration beyond the ASEC data and included IRS database information along with the Health and Retirement Study (HRS). Once the data was compiled a more complete view of retiree income was noted with clearly positive findings.

ORES compared the various data sets to determine if the ASEC study accurately captured retiree income sources and levels. When the multiple data sets were compared with the ASEC report it was apparent that certain retirement income sources were not being taken into account. Surprisingly, the missing income pieces included distributions from IRAs, qualified plans and pensions. When these elements were added to the calculations retiree income increased by about 30 percent . To quote the study “…[the study] showed that the difference in estimated income is mainly due to underreporting of retirement income (from both defined benefit pensions and defined contribution retirement account withdrawals) and that the discrepancy in median income between survey and administrative data increased from about 20 percent in 1990 to about 30 percent in 2012. This finding reveals that the discrepancy, attributable mainly to CPS’s failure to capture retirement account distributions, arose at a time when retirement accounts and withdrawals from such accounts became more prevalent.”

This makes sense; as time goes on, retirees will have had additional time to accumulate retirement assets in IRAs and qualified accounts and the gap should increase if changes in the ASEC methodology are not forthcoming.

The ORES data also demonstrates somewhat less dependency on Social Security retirement benefits. Policymakers have expressed concern over the numbers of retirees who have virtually no retirement income or assets other than Social Security benefits. Specifically, in the original ASEC report 26 percent of retirees receive at least 90 percent of their income from Social Security benefits. Once the additional retirement savings income is included, this number decreases to 12 percent−clearly a big improvement on the Social Security dependency issue.

Recall the original intent of the Social Security system was the reduction of poverty among the elderly. Under the study, if we look at the most expansive data set, the post-age-65 poverty rate is 7.1 percent. Certainly, by that standard, the system can claim success in reducing the poverty rate.

Retiree Income Range	Percentage
Less than 5,000	0.8
5,000–9,999	3.6
10,000–14,999	5.5
15,000–19,999	5.6
20,000–24,999	5.6
25,000–29,999	5.3
30,000–34,999	5.2
35,000–39,999	5.8
40,000–44,999	4.7
45,000–49,999	4.3
50,000–74,999	18.2	62.7%
75,000–99,999	12.5
100,000 or more	23.0

Conclusion

In summary, the SSA’s ORES paper has provided positive insights into how retirees are faring from an overall income perspective. These figures illustrate the current retirement system’s ability to help most (nearly 63%, see above) workers create a reasonable-more than $40,000 per year- retirement income. The system is not perfect but it is increasingly effective at delivering adequate retirement outcomes to most workers. That said let’s not be complacent; we can do more to support workers efforts towards achieving retirement income security. Initiatives could include more auto enrollment and escalation features, practical retirement and financial education and innovative retirement income products. Gloom and doom may sell media advertising but let’s take some comfort in the fact that the retirement system seems to be on a better path that we may have thought.

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Suspending Social Security retirement benefits

November 25, 2020/in Case of the Week /by jkiffmeyer

My client, who is 62 years old, just lost his job. He wants to file for Social Security retirement benefits and look for new employment. A friend told him he could suspend his Social Security benefits at a future date if he found new employment and, by suspending his benefits, he would not need to repay Social Security benefits already received. Is that correct?

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 Ohio is representative of a common inquiry related to Social Security benefits.

Highlights of the Discussion

No, that is not correct. “The friend,” although well-meaning, is mixing up a couple of key Social Security concepts.

Social Security retirement benefits can be stopped in two ways. The first method is referred to as the “withdrawal of application” and the second is “suspension of benefits.” Each has unique rules as noted below.

Withdrawal of Application

Must occur within 12 months of filing for benefits
The individual may elect this one time only
All benefits received must be repaid
Future benefits will be calculated as though the initial filing never occurred

Suspension of Benefits

Can occur only after reaching full retirement age and before age 70
No repayment is required
Delayed retirement credits are available prospectively until age 70

Thus, for a 62-year-old, because the individual has not reached full retirement age the only way to stop Social Security retirement benefits is through a withdrawal of application, which requires the repayment of benefits.

Conclusion

The rules related to Social Security withdrawal of application and suspension of benefits are complex, and other issues such as family benefits and Medicare considerations may come into play. Anyone contemplating theses decisions should seek expert advice from a tax and/or legal advisor.

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SSA’s “Heads Up” on Private Pension Benefits

August 20, 2020/in Case of the Week /by jkiffmeyer

“My client received a notice from the Social Security Administration (SSA) titled, ’Potential Private Pension Benefit Information.’ Why did he receive this form and what does it mean?”

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 Pennsylvania is representative of a common inquiry related to notices from the SSA.

Highlights of the Discussion

Your client received a Form SSA-L99-C1, Potential Private Pension Benefit Information from the SSA to inform him that he “ … MAY be entitled to some private pension upon retirement.” His family may be entitled to retirement or survivor benefits as well.
He received the form because, when an individual files a claim for Social Security benefits, the SSA automatically issues this notice to alert the individual that the SSA has knowledge of potential other retirement benefits that he or she may be entitled to receive under a defined contribution plan and/or defined benefit plan maintained at his former private employers.
According to a study,[1] 26 percent of terminated individuals over a 10-year period left their assets in their former employers’ plans, which equated to 61 percent of plan assets in motion. One reason for this may be that former participants with higher plan balances are more likely to leave their plan balances behind than those with smaller plan balances.
Your client may already be well aware of these additional benefits—and may have already received some of or all of them. But if not, you should review the plan information on the notice with your client and contact the plan administrator identified to make a claim for any benefits that may be due. Some or all of these benefits may be eligible for rollover.
The SSA keeps a database of individuals who have been identified by the IRS as having qualified retirement plan benefits under private employer-sponsored plans. When a former employee leaves behind accrued retirement benefits in an employer’s retirement plan, the employer must report such information to the IRS.
The information on the SSA form is somewhat limited. Fortunately, the Department of Labor (DOL) put together a helpful Q&A piece on this topic FAQs on SSA Potential Private Retirement Benefit Information.
Your client can contact the DOL with additional questions as well either on-line at “Ask EBSA” or by calling 1-866-444-3272.

Conclusion

Consider the Form SSA-L99-C1, Potential Private Pension Benefit Information issued by the SSA, as a friendly, “heads-up” notice regarding private retirement benefits to which an individual may be entitled.

[1] Alight, “What do workers do with their retirement savings after they leave their employers,” 2018

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Social Security and Economic Impact Payments

May 20, 2020/in Case of the Week /by jkiffmeyer

“My client is retired, receiving Social Security benefits and hasn’t filed a tax return for the last couple of years. For those collecting Social Security, how will the IRS issue Economic Impact Payments to these individuals?”

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 New Jersey is representative of a common inquiry related to Covid-19 Economic Impact Payments.

Highlights of the Discussion

According to an April 1, 2020, press release from the Treasury Department, Social Security beneficiaries who are not typically required to file tax returns will not need to file any additional forms or information in order to receive an Economic Impact Payment. Instead, payments will be automatically deposited to recipients’ bank accounts.

The IRS will use the information on the Form SSA-1099 and Form RRB-1099 to generate the Economic Impact Payments to Social Security recipients who did not file tax returns in 2018 or 2019. Recipients will receive these payments as a direct deposit or by paper check, just as they would normally receive their benefits.

Conclusion

Recipients of Social Security benefits who don’t file tax returns should automatically receive their Economic Impact Payments based on their Forms SSA-1099 and Form RRB-1099 in the form of a direct deposit or paper check.

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