Penalty Free SE earnings?

[Corduroy Frog]

One of my customers is turning 62 in 2022 and chomping at the bit to retire.  He is working for a public job, as a manager for a city dump/recycling center.  He has a ton of money in a 457(b), but I'm not sure whether that is relevant.

He is asking me about Social Security benefits, and customarily I just refuse to go there.  Whatever he is told by the Social Security office is going to prevail anyway.  He has already talked to them, and they (supposedly) told him that if he were a public employee, he could earn unlimited amounts of earned income annually without having to pay back 1/2 of the excess as a social security "penalty."

I'm not going to answer such questions, and if this is true, then so be it.  But I am curious.  Has anyone else on the forum heard anything like this?

[kathyc2]

I assume the public service job was one that is not subject to SS tax?  If so, it doesn't count as SS wages for the earning test. 

His SS benefits probably don't amount to much as they would be from other jobs (prior to public service, part time during, etc.)  I assume the SE in your title was an error, and he is not planning on quitting the city and starting a business with self employed income.  If he truly is looking at self employed income, they would be SS wages and benefits would be dinged after 19,560.

[Corduroy Frog]

Thank you Kathy.  He has had SS taxable earnings all his career, so this is not the case.

I simply believe he is misinforming me, and would be misinformed himself.  From what I know, he could tap into his huge 457(b) for any amount of $$, and it would not incur a SS penalty because it is not earned income.

I congratulate you for your knowledge of various types of employment not subject to SS tax.

 

[joanmcq]

Don’t 457 withdrawals get reported on a W2 and are considered earnings? Or am I just confused. Why is he looking to get SS at 62 if he doesn’t need the money?

[jklcpa]

3 hours ago, joanmcq said:

Don’t 457 withdrawals get reported on a W2 and are considered earnings? Or am I just confused. Why is he looking to get SS at 62 if he doesn’t need the money?

It's true that the 457 withdrawal is taxable earnings for income tax purposes, but for social security earnings it is counted when it is earned and not when it is paid out, so the payout would not cause a reduction or payback in social security benefits. 

[kathyc2]

11 hours ago, Corduroy Frog said:

I simply believe he is misinforming me, and would be misinformed himself.  From what I know, he could tap into his huge 457(b) for any amount of $$, and it would not incur a SS penalty because it is not earned income.

 

That is totally different that what you said in the first post.  You said earned income; as in a job.  There are a little different rules, but basically 457b is the same as a 401k.  Would you say someone could withdraw from a 401k and receive SS benefits?

 

[kathyc2]

5 hours ago, joanmcq said:

Why is he looking to get SS at 62 if he doesn’t need the money?

There could be many reasons.  The monthly benefits will be less, but he will receive them for a longer length of time. 

 

[Medlin Software, Dennis]

SS optimization, just like Medicare look back optimization, is an entire industry.  Unless you have all the facts (and few ever really do), there is no perfect answer.

Take the case of a parent with a disabled child (SSI).  If the child has a good chance of collecting SSDI (switched to when parent retires, based on parent SS amount!) long term, then the parent likely would want to optimize their SS amount by waiting to FRA, maximizing SS income, etc.  But, this presumes the parent, if possible, cannot "do better for their child" via some other means (investments, etc.).  Also presumes one believes SS will continue to be funded.

[Corduroy Frog]

17 hours ago, kathyc2 said:

Would you say someone could withdraw from a 401k and receive SS benefits?

 

Would I say someone could withdraw from a 401k and receive SS benefits?  Absolutely, and do so without incurring the penalty.

But my client is telling me he has talked to SS and they told him he could work all he wanted to and avoid the penalty.  I don't know how that can be true, since he has had SS taxable earnings on his W-2 for at least 25 years or so.

[Catherine]

On 12/30/2021 at 2:43 AM, Corduroy Frog said:

But my client is telling me he has talked to SS and they told him he could work all he wanted to and avoid the penalty.

That sounds like your client has misunderstood the information he was given. Regardless of his 457 pension, any current-year W2 earnings will affect the taxability of his socsec income if that income is high enough (likely won't matter if he's getting a $300/year as a stipend for some keep-busy job - some places won't let people volunteer; they must be on payroll, at least for a pittance). He's not mixing apples and oranges, he's mixing apples with kerosene and the combo is going to get him burned.