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Contributing to a 401K and Social Security Benefits

Hello to all,

I have a client that is nearing retirement. He is convinced he can retire early (62), work and earn $34,060, and his benefits will not be reduced. He determines this amount by the $20,500 that he would contribute to his 401K, plus the $13,560 maximum earnings and still receive full social secuity benefits.

I contend the $20,500 contributed to his 401K would count toward the maximum earnings, and his benefits would be reduced by $1 for every $2 in earnings above the $13,560. ($20,500 /2 =$10,250 reduction). Am I correct?

Thanks for any clarification you can provide.

Reply to
mmurrell
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Reply to
George Anthony

I don't know who's correct. It's SS benefit law, not tax law. One thing I do know for sure, though, is that the gross earnings will be reported to SSA on the W-2. I'm inclined to think they'd go with that number.

But there's absolutely no reason not to just call SSA and find out for sure. It's not like he's tipping them off to something they won't find out about anyway.

Reply to
Phil Marti

That document does not address the question. The question is: What is the amount of earned income used by the SSA when they make the determination as to whether the individual has exceeded the maximum allowable amount? Is it the amount in Box 1 of the W-2 or the amount in Box 1 plus any pre-tax contributions to a retirement plan?

For an employee, the earnings test uses "wages." SSA defines wages as the amount that is subject to social security tax. As such, it would be the amount earned before any pre-tax contribution to a retirement plan. Or in the case presented... $34060.

By the way.. the limit for 2009 is $14160.

Reply to
Alan

The amount that matters here, is Social Security earnings, reported on W2 forms in box 3, as opposed to Taxable earnings in box 1 which is derived by subtracting any permitted 401k contributions from the gross.

IOW, SSA don't give a .... whit.. about what's subject to income tax.

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

SSA uses wages shown in Box 3 of a W-2, which of course includes compensation put into 401-K's etc. Box 1 of his W-2 might show $13,560 but Box 3 will show $34,060. He will be locked into a lower benefit for not waiting, as well as have to pay back most of his benefits for that year.

Reply to
Brew1

As usual, the whisky mavEn is Absolutely correct.

Reply to
Arthur Kamlet

SSA does not use just Box 3. It uses the sum of Box 3 & Box 7.

Reply to
Alan

See my reply to Brew1. SSA uses the sum of Box 3 & Box 7.

Reply to
Alan

Quite true. We were focused on just the OP's situation and forgot about servers, or "wait staff", as the politically correct nomenclature dictates these days.

ChEAr$, Harlan Lunsford, EA n LA

Reply to
Harlan Lunsford

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