Retirement is something most people look forward to in the United States. This is because it offers them the opportunity to travel, spend time with their families and essentially relax. All that is possible because most people are going to qualify for Social Security benefits. However, some individuals, especially those who used to run their own business, may find retirement to be a little too dull for their liking. As a result, many will often go looking for part-time work to either have something to do or supplement their monthly income. But how much does this affect your Social Security benefits? Read on to learn about this very important topic.
How Your Social Security May Change
As stated above, beginning to work full or even part-time can drastically affect your Social Security benefits. Although there are various factors that the government will take into consideration before making any changes, it is still good to know the potential changes that may benefit you. Below are a few of those potential changes:
- Your benefits will vary depending on your age
- Your Social Security benefits may be reduced depending on your new income.
- The types of benefits may be eliminated or altered to account for your new income.
Understanding Full Retirement Age
One of the most common terms you will hear when considering opting in for Social Security is “Full Retirement Age.” This is because although you can certainly accept Social Security at 62, your benefits may be reduced depending on your birth year. What this means is that depending on the year you were born and the laws during that time, your “full retirement age” will matter greatly in terms of how much you get. For example, someone born in 1937 or earlier will reach full retirement age of 65 rather than today’s 62. Why does this matter so much? It matters because if you are legally at full retirement age, you can work and earn as much as you want without being penalized by the government.
Working Before Full Retirement Age
If, unfortunately, your birth year law states that you are not considered to be at “full retirement age” just yet, you will have to be careful about how much you earn each month. According to the Social Security department, individuals who are not at full retirement age and are currently working full or part-time can only make $1,580 per month or $18,960 per year. If you go beyond that limit, your benefits will decrease by one dollar for every two dollars earned over the limit. That is why it is highly recommended to keep a detailed record of how much you are earning through regular wages and yearly bonuses, as they will also be considered part of your income.
Social Security Earnings Limit for 2021
Earlier, we spoke about the fact that those who are at full retirement age can earn as much as they want without fearing a reduction in their benefits. However, things are going to be very different if you are reaching full retirement age within the year 2021. This is because now there will be an earnings limit imposed amongst many other changes. The new earnings limit for individuals who will be reaching full retirement age and receiving Social Security will be $4,210 per month or $50,520 a year. After every one dollar that is earned, three dollars will be reduced from your monthly Social Security check.
As you can see from the information above, several factors must be taken into consideration when deciding to return to the workforce. Although each person’s circumstance & experience will dictate how much or how little of their benefits are changed, much of the rules imposed by the Social Security department are universal.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
During his run for President, President Elect Joe Biden released a 110 page document to shade more light of his economic plan and the implications it has on retirement. So, what does the next 4 years look like for the impact it has on several factors such as the tax code, savings for retirement as well as social security.
TAX POLICY
Joe Biden’s tax policy plan with regards to retirement involves increment of taxes on the wealthy in a bid to raise revenue. These taxes could be raised from 37%-39.6%. Capital gainers especially those in the stock markets and real estate could also have their tax rates increased. Capital gainers that make about one million dollars in profit, could have their tax rates increased from the current 20 percent to about 39.6 percent which is almost double.
Doing this could help a lot with your retirement savings. This is so because withdrawals for IRA and 401(K) are not subjected to taxes for capital gains. Instead, they are only subjected to regular income taxations.
If you are making an income of a million dollars and have retirement investments that are non-qualified, then you may need to make changes.One way to achieve this is by delaying any withdrawals until when you stop working.
SOCIAL SECURITY
The American social security was in question during the campaign, with experts stating that it might not go beyond 2035. Because of this, President Elect Joe Biden’s policy has put in place measures that will at least work to ensure that it lasts longer and get back on track. Biden plans on doing this using the approaches discussed below:
Expansion of Social Security Benefits
• This plan involves new benefits which is minimum for people who have worked for 30 years. These will be subjected to a poverty level of about 125%.
• The second way the social security benefits will be expanded is using monthly increased benefits for some retirees.
• A 20% increment is also expected for widows and widowers.
• Older retirees are also set to benefit by receiving an increment to cover for their health costs and savings that have gotten depleted. This however applies only to retirees who have at least 20 years of receiving the benefits for social security.
Terminating any kind of social cuts
• The Biden plan will work on doing away with any cuts in social security. This includes cases where the retirement age was raised and only Americans of low income were getting benefits from the program.
• Biden also plans on making it unlawful to repay the loans for federal students using the income from social security.
iii) The “donut-hole” Approach
• Here, Biden plans on subjecting the highest earners to increased taxes.
• For now, only $137,700 of the annual earnings for employees are subjected to taxes for security payroll.
• In Biden’s new plan, earnings that will be exempt from taxes related to social security will be between $137,000 and $400,000. What this means therefore is that any earnings beyond $400,000 will be taxed.
RETIREMENT SAVINGS
Despite the fact that Biden has put every measure in place to ensure that the social security is expanded and more stable, his plan also reiterates on the importance of making savings either in the IRA OR 401(K).He plans to encourage savings through the following measures…
Creating incentives for Employees and their Employers
• About 40% of the US Economy is accounted for by businesses that are small. These businesses are often quite reluctant about giving their employees benefits for retirement, citing costs and other administrative issues.
• Through the SECURE Act plan therefore, the Biden plans on giving small businesses more tax breaks. This is in a bid to help them organize for a retirement plan for their employees so that they can invest more on their future.
• The Biden plan also called for automatic 401(K) to encourage making savings especially for the employees who are not attached to any sponsored employer plans.
Contributions of Caregivers
• Deferrals of up to a particular amount in one’s account for retirement are often allowed by the current law.
• For instance, the limit for contribution for 401 (K) for this year, 2020 is $19,500.
• Sometimes however, unavoidable circumstances may subject an individual to go for temporary leave.
• During that window period, they may thus be unable to make contributions to the required amounts.
• The Biden plan takes care of such individuals by offering them a chance to bridge the gap when they get back to the workforce. This is achieved by ensuring that their limits for annual contributions are raised, hence enabling them to catch-up comfortably.
401(K) Tax Benefit Equalization
• The Biden plan allows for anyone with deferrals for tax 401(K) to use contributions from pre-tax to rapidly grow their accounts. When it comes to such an individual’s time to retire, they shall use these taxes which will depend mostly on their annual earnings at the given time.
• Biden’s team also worked to ensure that the tax benefits for those with 401(K) accounts are equalized.
• The plan also proposes using a flat tax credit. This will be a major relief especially because the contributions for retirements are tax-deductible. When you file your returns therefore, they will not be considered as income that is taxable.
• The Biden plan will work to ensure that your taxable income is not inclusive of any other tax credits. What this means is that irrespective of the fact that your full salary will be taxed, your tax bill will be exclusively dependent on the contribution you have in your 401(K) account.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
The time is finally here. It’s when the chickens come home to roost. In most of the financial blogs of late concerning Social Security, it’s been nothing but doom and gloom. Everyone is scared the trust fund will run out of money, and suddenly, Social Security will go away.
We’ve been reading about this for a long time. Economists have sounded the alarm many times over the years about the imminent insolvency of Social Security if fixes aren’t put into place to shore up the deficiencies.
If you allow the media to guide your thinking, you might be in this train of thought – and you would be very wrong. Let me explain. Social Security will indeed see a first in 2021. It is the first year it will outlay more than it brings in from payroll taxes. It was not unexpected.
Contrary to popular opinion, Social Security will never go bankrupt as long as people work and pay taxes. The real problem is not enough money is flowing back into the trust fund, causing the shortfall and leading to the cuts in benefits.
According to the fool.com, 2020 is the year Social Security should break even, but at some point during the year, it will start running in the red. That means Social Security has been running a surplus until this year. A far cry from the death knell of the plan forecasted by so many.
Time for Some Truth and Good News
Make no mistake. If we expect Social Security to perform as designed, it needs some help. But, the truth is the program is not broke and won’t go broke. The worst-case scenario for the foreseeable future is reduced benefits if no changes to the system happen at all.
Even with all the bad news about Social Security, Congress has the power to fix it for good. That is the most significant sticking point in this whole mess. Republicans and Democrats don’t show any sign of a willingness to come to the table and talk it out.
It looks like some drastic changes will come about to force the issue. Congress can’t keep kicking the proverbial can down the road. The end of the road is here and now. Many wonder how the Coronavirus will play into all of this.
Coronavirus and Social Security
More doomsayers joined in the chorus of using the pandemic as convincing evidence of the demise of Social Security. While it’s true that fewer people working means a drop in payroll taxes to pay benefits, more pressure on Congress to act should be a good thing.
Pointing fingers of blame at high earners or baby-boomers for the funding shortfall of Social Security proves no one yet has the right answer to advance an agenda to address this elephant-in-the-room scenario we find ourselves dealing with every election cycle.
Whenever this gets settled, higher taxes will be front-and-center, with many willing to fight to keep the changes and those to challenge them. The magic bullet is higher taxes, raising the retirement age, or both, and everyone knows it’s the only way to fortify the system for the coming years substantially. Of course, with an easy answer like raising taxes, people wonder why it took years to fix a years-old problem.
This year has been quite an adventure for people who need to file and pay taxes. COVID-19’s impact on the economy led to the delaying of the income tax filing date as well as the passing of the CARES Act, or what’s otherwise known as the COVID-19 Stimulus. If you met the eligibility requirements set forth by Congress and the Treasury Department, you received a payment from the government for the amount you qualified for.
Many people may have questions about whether receiving stimulus payments will mean a lower amount in their tax return, or a higher amount in taxes owed. But it may be especially worrisome for those who are currently receiving social security benefits because they have an additional source of income and filing procedures to deal with. Here’s what you should know about how stimulus payments will affect how you file taxes.
Who Gets Stimulus Payments?
Stimulus payments are intended to go to tax payers who have either already filed, or who will file taxes for the years 2018 and 2019. Note that social security beneficiaries are also included in this group. You qualify for $1,200 if you filed individually and your annual income is $75,000 or less, and $2,400 if you filed jointly with your spouse and your combined annual income is $150,000 or less. If you have any children under age 17 who you claimed as dependents, you get an additional $500 per child. If you filed as a head of household, your income can be as high as $115,000 to get the $1,200 payments as well as the $500 per qualifying child.
You will not get a stimulus payment if you have an annual income of $99,000 or more when filing as an individual, $136,500 or more when filing as a head of household, or $198,000 when filing jointly. You also cannot get one if you’re classified as a dependent, don’t satisfy the requirement in the IRS’s non-filer tool, or are a non-resident alien. Bear in mind though that payments are received much quicker if you met the April 15 deadline for direct deposit of your payment, because otherwise receiving it via check in the mail could take months.
How Social Security Benefits Affect Receiving Stimulus Payments
Those who have been receiving social security benefits since before January 1 of this year, and who do not regularly file federal income taxes automatically receive stimulus payments. Those who started receiving them after January 1 of this year, and who didn’t file tax returns for 2018 or 2019 will need to use the non-filer tool to make sure they get their payments. If you used the non-filer tool to enter information about dependents qualifying for the $500 payments after the set deadline, you will have to wait until next year to get those payments.
Social Security Benefits Tax And The Stimulus
One thing to be clear on is that a stimulus payment is NOT considered income according to the IRS. You simply report it as a tax refund credit on next year’s tax form, but your tax owed or refund amount for the year 2020 will not be affected. If you’re a social security beneficiary, your stimulus payment will also not affect your provisional income amount which affects how much you owe in social security benefits taxes. Your provisional income is an amount that’s calculated taking your AGI calculated without student loan interest deductions or tuition fee deductions, adding any tax-free interest your investments such as 401k’s or IRAs have earned, and adding all of that to 50% of the current amount of your social security benefits.
If your provisional income is $25,000 or less and you’re a single tax filers, or $32,000 or less and a joint tax filer, you owe nothing on benefits taxes. You will owe up to 50% in benefits taxes if you’re a single tax payer whose provisional income is between $25,000 and $34,000, or a joint filer whose income is between $32,000 and $44,000. Any provisional income over $34,000 as a single filer or $44,000 as a joint filer will subject you to an 85% tax on your social security benefits. However, if you received a stimulus payment, it will not move your provisional income from one tax bracket to another, and as such you will not have to worry about seeing your benefits decrease.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.
