While understanding when to collect Social Security may seem straightforward, there are many factors — such as having multiple sources of retirement income or having a spouse — that can substantially impact how much you earn in benefits.
"A lot of people think the nice folks down there [at the Social Security Administration] will help you or help to guide you and review your options with you," says Marc Kiner, a CPA at Premier Social Security Consulting. "But that's just not going to happen."
In order to maximize how much you receive in Social Security benefits, it's important to understand the various factors that can affect how much you collect in benefits. Below, Select looks at three things that people should keep in mind when collecting their Social Security benefits.
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What you need to know about Social Security
First off, let's establish some basics about Social Security. The Social Security administration determines a worker's benefit, known as the primary insurance amount (PIA), by using a calculation based on a worker's 35 highest earning years, says Kiner.
Workers are able to start collecting benefits at age 62 but their benefit will be reduced if they don't wait until full retirement age. Full retirement age is between 66 and 67, depending on when you were born.
If you wait until you're at full retirement age to collect, you're eligible to receive 100% of the benefits that you're entitled to. For every year after full retirement age (until age 70) that you delay receiving benefits, your benefits will increase 8% each year.
1. Social Security benefits may be subject to income tax
If you're collecting Social Security benefits at or past full retirement age, your benefits may be subject to federal income tax. For workers with other sources of retirement income, up to 85% of their benefits may be taxable.
The Social Security Administration considers wages, interest and dividends as taxable income.
Distributions from pre-tax retirement accounts, like a 401(k) or a traditional IRA, are typically considered income. This means that retirees taking distributions from pre-tax-retirement accounts should expect those distributions to influence how much of their Social Security benefits are taxed.
In contrast, distributions from a Roth IRA or a Roth 401(k) are not considered income because people pay taxes on their contributions upfront, according to Kiner.
If you're seeking to reduce your future tax bill, you might want to supplement your Social Security benefits with money from a Roth IRA or a Roth 401(k).
With a Roth IRA and a Roth 401(k), individuals pay taxes on their upfront contributions, allowing their investments to grow tax-free. A Roth 401(k) is an employer-sponsored account so if your company doesn't offer one, you could open a Roth IRA if you're eligible.
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The Social Security administration determines what percentage of an individual's or a couple's benefits are taxable by calculating someone's combined income. Combined income is based on your adjusted gross income, your nontaxable interest and half of the value of your Social Security benefits.
The IRS offers an online tool to help you figure out if your benefits are subject to federal income tax and what percentage of your benefits are taxable.
- For individuals with a combined income of between $25,000 and $34,000, up to 50% of your benefits are taxable
- For individuals with a combined income of more than $34,000, up to 85% of your benefits are taxable
- For couples with a combined income of between $32,000 and $44,000, up to 50% of your benefits are taxable
- For couples with a combined income of more than $44,000, up to 85% of your benefits are taxable
There are also 12 states that have an additional income tax on Social Security benefits for some residents: West Virginia, Colorado, Kansas, Missouri, Connecticut, Montana, Nebraska, New Mexico, Vermont, Minnesota, Rhode Island, and Utah.
2. The value of your spouse's benefit depends on when they choose to collect
Spouses and ex-spouses are eligible to receive a Social Security benefit on their partner's work record. The Social Security administration calculates whether an individual receives more benefits from their own work record or from their spouses' work record, automatically giving out the higher benefit.
The spousal benefit is worth up to 50% of the higher-earner's benefit. You must be at least age 62 to receive the spousal benefit, and you can only earn it once the higher-earner has started collecting their benefit.
In order to maximize the spousal benefit, individuals should wait until they reach full retirement age to collect it. At full retirement age, a spouse can earn 50% of the higher-earner's benefit. If you decide to collect before full retirement age, your benefit will be reduced by a certain percentage for every month prior to full retirement age.
Furthermore, whether a higher-earner chooses to collect their benefits at or before full retirement age has no impact on the value of the spousal benefit. This means that a spouse can earn up to 50% of the higher-earner's benefit, regardless of whether the higher-earner waits until full retirement age to collect.
For example, if the higher-earner collects before their full retirement age, like at age 64, their spouses' benefit at full retirement age is still equal to 50%, says Kiner.
Lastly, ex-spouses are allowed to collect benefits on their ex's work record as long as they were married for at least 10 years to the worker. Unlike the traditional spousal benefit which requires that the higher-earner collect their benefit before their spouse can, individuals can collect the ex-spouse benefit even if the worker has not collected their own benefit yet.
You'll need to have been divorced for at least two years before applying and be at least age 62. You can maximize how much you receive by waiting until you're at full retirement age. At full retirement age, you'll receive 50% of the worker's full benefit. According to the Social Security administration, you can't collect benefits on your ex-spouse's record unless your later marriage is ended by annulment, divorce, or death.
3. You may be able to suspend your benefits in order to maximize how much you receive
Once you've started collecting Social Security retirement benefits, you're not necessarily locked into receiving benefits for the rest of your life. If you've reached full retirement age and wish you would have waited longer to receive a greater percentage of your benefits, you have the option of suspending your benefits.
Since an individual's benefits increase by ⅔ percent each month or 8 percent each year after full retirement age, suspending your benefits after you've started collecting allows you to wait longer, so you can earn more.
For every month you choose to delay credits, you'll earn ⅔ percent more each month. After you've suspended your benefits, you can also request that the Social Security administration resume payments for you at any time before the age of 70. However, if you have anyone — like a spouse or ex-spouse — collecting benefits on your work record, they won't be able to collect their benefits.
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