Tuesday, July 5, 2011

Social Security: On paying back benefits, SEP IRA's and working too much

The folks at the Social Security Administration were kind enough to set up a telephone appointment with me last week to go over a couple of my questions.
My first question: Can I still pay back Social Security when my mother dies or has something changed?
Second question: If I make more than the maximum $14,160 in earned income this year, what happens?
These are important questions for people like me who retire before they reach full-retirement age (in my case, age 66. I'll be 65 in October). Here's what I found out.
The tax package passed by Congress and signed by President Obama in December 2010 eliminated the option of paying back Social Security benefits and upgrading benefits to a higher payout rate. Unfortunately, that had been my plan.
I started taking benefits in January at age 64, two years before my full retirement age. At the time, Social Security would have allowed me -- at a future date -- to pay back the benefits I received. My plan was to use some of my expected inheritance whenever my mother dies to do that. I then could have restarted benefits at my full-retirement rate, which for me would be about $3,000 more a year than I'm collecting now. The rule change eliminated this option although the Social Security representative with whom I spoke said the agency was still developing a policy for the new rule.
He told me that those like me who started taking benefits this year had 11 months from the time of filing for benefits to withdraw from the program and repay the money. For me that would be November 2011.
Bottom line: Anyone who filed for benefits with the idea of repaying them later, now only has 11 months from the time of that filing to repay them. That's at least the way it is now. Before making any big decisions, call them.
Collecting while working
Meanwhile, I'm working part-time to supplement my Social Security income but because I'm am not yet at full retirement age, Social Security will withhold benefits if I earn more than $14,160 a year.
The good news is that this is earned income only...not non-work income from pensions, annuities, investment income, capital gains and other government benefits. Only wages earned on the job count.
Someone suggested that if I set up a SEP IRA and made contributions as a self-employed person, I could lower my earned income total with the IRA deductions. Nope, said the Social Security guy.
A SEP IRA is a nice idea for self-employed people as a way to put money way for retirement but any deductions are reported on an IRS1040, not on Schedule SE, the tax form for the self-employed.
Again, the good news is that Social Security looks at net earnings AFTER business expenses.
But for every $2 earned over the income limit, Social Security holds back $1 in benefits in the following year. For more on all this go to www.socialsecurity.gov and find the page "How Work Affects Your Benefits."
Once you reach full retirement age, you can earn as much as you want and not face any withholding penalties. Whoopie!!
For more: Go to www.socialsecurity.gov
or call 800-772-1213.

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