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  • Writer's pictureChris Stein, CFP®

Grace Year Confusion

Looks like another Social Security office has confusion over the “Grace Year”.  Even though we have covered this recently I am choosing to post on it again since there is still a lot of confusion for not just the public, but for the Social Security offices themselves.  We received the following this week:

“I’ll be 65 this June 2018, born 1953. Thinking of receiving SS benefits this July 2018. I currently work full time and have medical insurance through my employer. I understand that while collecting SS benefits, I’m allowed to make a gross amount of $1,420. Over that amount each month there’s a penalty which I understand. I keep getting conflicting info from my local SS office pertaining to what I will have already made the first 7 months of this year and how/if it effects my monthly SS benefit and whether I can continue to work part-time. Since I’ll have made $20K+ the first 7 months of this year, does that mean I cannot work the rest of this year? Does it also mean that my monthly benefit will be cut $1 for every $2 over the allowed monthly amount of $1,420? Do these first 7 months of 2018 go against me? It’s so frustrating when you can’t get a correct and same answer from anyone at the Social Security Office.”

Earnings Test

Normally the earnings test is applied on an annual basis, so any earnings in any month would count towards any benefit reduction due to earnings in a given year.  However, there is a provision that protects people in your circumstances from this in their first year of retirement.  This provision is called the “Grace Year” and is a way for you to elect to have the earnings test applied on a monthly basis, rather than annually.  You can elect this provision one time for one year.

Earnings Limit

The earnings limit for 2018 is $17,040.  You are correct that if the SSA counted all your earnings this year you would be subject to the offset due to the earnings test.  Your benefits would be reduced $1 for every $2 over the $17,040.  However, by electing to have the SSA apply the earnings test on a monthly basis, they look at every month you receive benefits and at the earnings from that month only.  If in any of those months you earn over $1,420 ($17,040 divided by 12), you will experience the same $1 for every $2 reduction as before.  By electing this method, you will see no reduction due to earnings that occurred in months prior to claiming your social security in July.  You will see a reduction if you earn more than $1,420 in any months from July to December.

If your local office is having difficulty with this, ask to speak to a supervisor or a technical expert in the office. They will confirm what I am describing.

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