Common Mistakes to Avoid

Mishandling your senior retirement timeline can cost you tens of thousands of dollars over your lifetime. When dealing with the earnings test and taxation rules, retirees repeatedly fall into a few predictable traps. Protect your wealth by avoiding these common errors.

• Assuming withheld benefits are gone forever. This is the most pervasive myth surrounding the earnings test. When the government withholds your checks due to excess earnings, they do not steal the money. Once you reach Full Retirement Age, the SSA recalculates your monthly payment upward to account for the months you did not receive a check. While you experience a short-term cash crunch, your lifetime payout is adjusted to return those funds over your later years.
• Misunderstanding what counts as income. Many retirees mistakenly limit their IRA withdrawals or hold off on selling stocks because they fear triggering the earnings limit. Remember, the earnings test only applies to W-2 wages and self-employment income. You can withdraw $100,000 from a 401(k) and keep your full early Social Security check.
• Failing to update income estimates with the SSA. If you claim early and continue working, the SSA requires you to estimate your annual earnings. If you overestimate, they withhold too much and refund you the next year. If you underestimate, they will demand a lump-sum repayment when they reconcile your tax records. Keep the SSA updated if your work hours change mid-year.
• Ignoring state taxes on Social Security. While federal tax rules apply to everyone, where you live dictates your state tax burden. Several states continue to tax Social Security benefits, while others exempt them entirely. Always factor your local tax laws into your net income projections.