Social Security Earned Income Penalty
Understanding How Working Affects Your Social Security Benefits
When helping clients prepare for retirement, one of the most important conversations we have involves understanding how working while collecting Social Security can affect benefit payments. The Social Security Earned Income Penalty—also known as the Retirement Earnings Test—is one of the most commonly misunderstood rules in retirement planning.
At Greenbush Financial Group, we educate clients on how this penalty works, when it applies, and how it fits into their broader financial strategy. For individuals planning to continue working in their early-to-mid 60s, understanding this rule is essential to avoiding unintended reductions in benefits.
What Is the Social Security Earned Income Penalty?
The Social Security Earned Income Penalty applies to individuals who begin receiving Social Security benefits before their Full Retirement Age (FRA) and continue to earn income from working.
If your earned income exceeds certain annual limits, Social Security will withhold a portion of your benefit. These earnings limits change each year and apply only until you reach FRA.
It’s important to understand that this is not a tax and not a permanent loss of benefits. Withheld benefits are gradually credited back into your monthly payment once you reach full retirement age.
Once You Reach Full Retirement Age, the Penalty Disappears
The Earned Income Penalty applies only prior to Full Retirement Age.
Beginning the month you reach your FRA, you can earn unlimited income from work without reducing your Social Security benefit.
Additionally:
Any benefits withheld before FRA are recalculated and added back into your benefit
Your monthly benefit may increase once you reach FRA to account for withheld payments
This makes FRA an important planning milestone for individuals who intend to keep working.
What Counts as Earned Income?
One of the most important aspects of the Earned Income Penalty is understanding what types of income count toward the limit.
Only earned income counts.
This includes:
Wages from employment
Self-employment income
Bonuses, commissions, and tips
These types of income do not count toward the limit:
Pension income
IRA or 401(k) distributions
Investment income (interest, dividends, capital gains)
Rental income
Passive business income
Annuity payments
Social Security benefits themselves
Many retirees are surprised to learn that withdrawals from retirement accounts, rental properties, or taxable investment accounts do not impact the Earned Income Penalty.
This creates meaningful planning opportunities for individuals who want to begin Social Security early but manage earned income strategically.
How is the SS Earned Income Penalty Calculated?
The penalty applies in two situations:
Before the year you reach FRA
Social Security withholds $1 in benefits for every $2 you earn above the annual earnings limit.During the calendar year in which you reach FRA (but before your birthday month)
Social Security withholds $1 in benefits for every $3 you earn above a higher limit.
Because the rules differ based on timing and income levels, we help clients determine when early filing makes sense—and when it may create unnecessary benefit reductions.
Why The Earned Income Penalty Matters in Retirement Planning
Understanding the penalty helps answer key planning questions such as:
Should you file for benefits at 62 if you plan to keep working?
Should you delay until FRA to avoid reductions?
How does the penalty interact with spousal or dependent benefits?
How are the penalty months refunded at FRA?
We integrate all of these factors into a broader retirement income plan so clients maximize their Social Security benefits while maintaining flexibility in their work and lifestyle.
Our Social Security Blog Articles
“This is a must-know for anyone considering early retirement! The earned income penalty can catch people off guard, but with the right planning, it’s totally avoidable.”
This endorsement provided for Greenbush Financial Group, LLC on YouTube was a non-solicited and non-paid comment by a non-client.
Frequently Asked Questions About the Social Security Earned Income Penalty
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What is the Social Security Earned Income Penalty?It’s a temporary reduction in Social Security benefits for individuals who claim before full retirement age and earn income from working above the annual limit.
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Does the penalty apply after I reach full retirement age?No. Once you reach FRA, you can earn unlimited income with no reduction in Social Security benefits.
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What types of income count toward the earnings limit?Only wages and self-employment income count. Investment income, pensions, rental income, and IRA withdrawals do not.
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Are the withheld benefits gone forever?No. Withheld benefits are credited back into your monthly payment once you reach full retirement age.
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Can working reduce my spousal or survivor benefits?Yes—if you are under FRA, earned income may reduce spousal or survivor benefits as well.
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How does the penalty work in the year I reach FRA?The earnings limit is higher, and Social Security withholds $1 for every $3 earned above the limit until the month you reach FRA.
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If I retire mid-year, does the earnings limit still apply?Possibly. Social Security offers a special monthly earnings test that may exempt you from the annual limit in the months after you retire.
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Is it ever wise to file early even if I’m working?Yes, in certain cases—for example, when dependent benefits are available, or if earnings are below the limit. We help clients evaluate this on a case-by-case basis.
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About Our Firm: Greenbush Financial Group is an independent registered investment advisory firm based in Albany, New York, that provides four main services to clients: fee-based financial planning services, investment management, employer-sponsored retirement plans, and retirement planning services. The firm serves clients locally in the Albany region and virtually across the United States.
