Social Security traps to avoid

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When the time comes for you to collect Social Security, make sure you know the ins and outs of this complex program.

If you’re looking forward to turning age 62 so you can begin collecting Social Security benefits and live on easy street, you might get caught off guard. Some of the Social Security rules can be frighteningly complex.

Because it will likely represent a large portion of your retirement income, it’s important to understand how the government program works. For instance, there are limits on how much you can earn while collecting benefits, and if you exceed those limits, your Social Security benefits will get cut substantially. That’s just one of the snares that could trip you up.

Make sure you plan appropriately to avoid these six Social Security traps.

If your earnings exceed a certain level, up to 85 percent of Social Security benefits may be taxable. Even income sources that are normally tax-exempt, such as income from municipal bonds, must be factored into the total income equation for the purpose of computing tax on Social Security benefits.

When your taxable income, tax-free income and half of your Social Security benefit exceed $25,000 ($32,000 for married couples filing jointly), that’s when you’re in the zone to pay taxes on Social Security income.Up Next0                         How to get more Social SecurityDon’t wait until you’ve got gray hair to start thinking about Social Security. If you do the right things now, you can maximize the benefits you’ll receive.Share

Trap No. 2: Must take required minimum distributions

Required minimum distributions, or RMDs, must generally be made from tax-deferred retirement accounts, including traditional IRAs, after a person reaches age 70 ½. The distributions are treated as ordinary income and may push a taxpayer above the threshold where Social Security benefits become taxable.

Trap No. 3: Some workers don’t get Social Security

Most people assume Social Security is available to seniors throughout the U.S., but not every type of work will count toward earning Social Security benefits. Many federal employees, certain railroad workers, and employees of some state and local governments are not covered by Social Security. However, certain positions within a state government may be covered by Social Security.

Find out whether your employer participates in Social Security or not and if not, whether your position may be covered by Social Security. Make sure you understand where your retirement benefits will be coming from.

Trap No. 4: Early benefits could be a big mistake

If you opt to take Social Security as soon as you are eligible, you may be doing yourself an injustice. “If you delay taking benefits until age 70, you will see as much as an 8 percent increase in benefits for each year you delay,” says Steve Gaito, Certified Financial Planner professional and director of My Retirement Education Center. “In addition to receiving a higher benefit, the annual cost-of-living adjustment will be based on the higher number.”

Of course, life expectancy plays a part in the decision of when to begin drawing benefits.

Trap No. 5: Windfall elimination provision

If you work for multiple employers in your career, including both employers that don’t withhold Social Security taxes from your salary (for example, a government agency) and employers that do, the pension you receive based on the non-covered work may reduce your Social Security benefits.

Social Security applies a formula to determine the reduction. In 2012, the maximum WEP reduction was $383.50. There is a limit to the WEP reduction for people with very small pensions.

Trap No. 6: Limits on benefits while working

You are allowed to collect Social Security and earn wages from your employer. However, if your wages exceed $15,120 in 2013, your Social Security benefits will be reduced by $1 for every $2 you earn above that level, says Mark Spittell, senior director at Alvarez & Marsal Taxand.

During the year in which you reach full retirement age — which ranges from age 65 to 67, depending on your birth year — you can earn up to $40,080 before $1 of your Social Security benefits will be deducted for every $3 you earn above that threshold. However, the money isn’t lost forever. You will be entitled to a credit, so your benefits will increase beginning the month you reach full retirement age.

At full retirement age, no income restrictions apply. If you plan on working beyond age 62 and anticipate earning more than $15,120 per year, strongly consider putting off Social Security benefits.