Q & A
Ask Rusty – About Social Security’s “First Year” Rule
Dear Rusty: I am 63. My birthday is 10/23/1957. I currently draw a small pension of $14K and a salary of $75K. I’m contemplating retirement at the end of April this year and I’d like to start drawing Social Security beginning June 1st. I’ve been told by friends that I won’t be able to start drawing it this year because I will already have exceeded the maximum Social Security allows me to earn in a year. Is this true? Should I postpone my retirement until the end of the year? Please advise. Signed: Confused by Friends
Dear Confused: Yours is a perfect example of why you should always check with a reputable source when receiving Social Security advice from friends.
Whenever Social Security (SS) benefits are claimed before reaching full retirement age (FRA), the so-called “earnings test” applies. This sets an earnings limit, which for 2021 is $18,960 annually – an amount you will have exceeded by the time you start your SS benefits in June. However, Social Security also has a special “first year” rule which applies to anyone who claims early Social Security benefits mid-year.
The first-year rule essentially waives using the annual earnings limit in your first year and, instead, applies a monthly earnings limit for the remainder of the year after your benefits start. The monthly limit is 1/12th the amount of the annual limit, so in 2021 the monthly limit is $1,580. Provided you don’t exceed the monthly limit after your benefits start and during the period from June 2021 through December 2021 (and if you’re fully retiring from work you won’t), you’ll not exceed the earnings limit during your first year collecting benefits. Note, your pension and other “passive” income doesn’t count toward the earnings limit; only earnings from working count. So essentially, using the “first year” rule means your earnings before you claim benefits won’t count, including any final pay you receive in the month you begin your benefits.
Starting in 2022, should you decide to return to work, you’ll be subject to the annual limit, which will be a bit more than the 2021 limit because the limit changes annually with changes to the National Average Wage Index. The earnings limit applies until you reach your full retirement age, after which you can earn as much as you like without jeopardizing your Social Security benefits. In the year you reach your full retirement age of 66 ½, your annual earnings limit will increase by about 2.6 times, further mitigating risk of exceeding the earnings limit in the year you attain FRA.
For awareness, if you were to return to work in any year between 2022 and the year prior to the year you attain FRA, and you exceed the annual earnings limit, Social Security will take back benefits equal to $1 for every $2 you are over the limit. In the year you reach FRA, if you were to work and exceed the increased limit, SS will take back benefits equal to $1 for every $3 you exceed the limit by. However, at your FRA you’ll receive time-credit for any months your benefits were withheld because you exceeded the earnings limit, which will result in your benefit amount being increased slightly at your full retirement age. In this way, you may, over time, recover any benefits which were withheld because you exceeded the earnings limit.
Social Security’s “First Year rule, if you first year is the year you reach FRA. Starting SS in January when FRA is May
Michael,
The “first year rule” applies whenever you apply for benefits, but if you will reach your full retirement age (FRA) in May and want to start your benefits in the immediately prior January, the Social Security “earnings limit” for you will only apply to the months of January thru April, and the limit will be considerably higher (about 2.5 times higher) than the normal annual limit. For example, the 2024 earnings limit for your FRA year is $59,520 instead of the standard 2024 earnings limit of $22,320 (these amounts will be higher next year). And, once you have reached your full retirement age the earnings test no longer applies. So, using 2024 numbers, as long as your January – April earnings do not exceed $59,520, you can apply for your benefits to start in January, and the earnings test will no longer apply beginning in May, thus no penalty for exceeding the 2024 limit will occur. If you’re planning to claim in January 2025 and will reach your FRA in May, the same rule will apply but the numbers will be a bit higher.
Russell Gloor
National Social Security Advisor
The AMAC Foundation
Good evening,
I hope you are well. I’m currently receiving disability and I have 2 kids under 18 years so I’m also receiving benefits on their behalf. Other than necessary expenses for them( groceries, medical, braces, allowances, tutoring, phone etc..) am I allowed to use those funds for filling up the car at the gas station? I’m a stay at home mom and they are included in 95 % of my trips (to and from school, to and from supermarket, to and from my sister’s house etc…). Also, is using the funds to pay monthly mortgage acceptable? They live with me. Kindly let me know.
As Representative Payee for your children’s benefits, you are required to use their benefits only for their welfare. As your children’s biological parent, Social Security gives you substantial flexibility on how to use their benefits for their welfare, including providing food, utilities, shelter, dental and medical costs, etc. And Social Security generally doesn’t require you to regularly report details, but they do still require you to keep detailed records of how you use the children’s SS benefits and they can request an accounting at any time. You must essentially use those benefits for your children’s current needs, and save anything left over for their future needs. Paying for filling up your car isn’t included in Social Security’s definition of how child’s benefits may be used, nor is paying your mortgage, but in the end the validity of those items would be up to Social Security to make a determination on. Here’s a link to Social Security’s guidance on how a Representative Payee may use SS benefit for a minor child’s welfare: http://www.ssa.gov/payee/faqrep.htm?tl=14
My suggestion is to use your children’s SS benefits only in the manner specifically suggested in this guidance document.
Russell Gloor
National Social Security Advisor
The AMAC Foundation