Annuities and Social Security Income Limits
August 27, 2020
Social security benefits may be affected by your age, the time you elect to begin receiving payments, and by how much money you make. People close to retirement age may wonder about annuities and social security income limits. However, the Social Security Administration (SSA) does not count income from pensions, annuities, dividends, or interest. It only counts “earned” income, which is the wages you receive from a job or profits from self-employment, plus commissions, bonuses, and vacation pay.
There is a notable exception, however. Some individuals receive Supplemental Security Income (SSI) due to a disability that makes it difficult or impossible to work and support themselves. This is a “means test” program, meaning the SSA puts strict limits on how much income you receive based on your total resources. This includes both earned and unearned income and the value of things you own. If someone receiving SSI also receives annuity payments, their SSI may be reduced or terminated.
Age-Based Income Limits
For non-disabled workers, the SSA places a limit on how much earned income you can have per year while also drawing social security benefits. The earliest age you may begin drawing social security is 62, while the full retirement age is 66 or over for those born after 1943. Anyone born in 1960 or later doesn’t reach full retirement age until 67. Generally speaking, it’s best to wait until full retirement age to begin drawing social security. This is because if you take payment early than that, your payment will be reduced by as much as 25-30%. Furthermore, if you begin taking social security payments before your full retirement age, your benefit will be reduced by $1 for every $2 over the income limit social security imposes. For 2020, that income limit is $18,240.
SSA applies a formula to determine your benefits if you retire at your full retirement age unless you were earning more than $48,600 in the months before you retire. Your benefit will then be reduced by $1 for every $3 you earned over the limit in the months before the month in which you reach full retirement age. Once you reach full retirement age, there is no limit on your earnings.
The SSA provides useful calculators to determine your full retirement age and covers how your earnings could affect your benefits depending on your age.
Annuities can supplement social security income to help bridge any income gap between what you’ll receive from social security and what you may need for a comfortable retirement. Remember, however, that even if the SSA doesn’t count unearned income, you will still pay taxes on annuities (unless purchased with after-taxed dollars), dividends, capital gains, and interest from investments. If you are asking yourself, “do I need an annuity?” consult your tax and financial advisors to help you determine whether you will have enough income for retirement as well as how that income may be taxed.
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