Does Passive Income Affect Social Security Benefits?
The Wealth Gang team writes about financial information, passive income ideas, apps, programs, cash management tools and other wealth gadgets that we think you might want to use or learn more about. Sometimes, we write about products, services or items that might be associated with affiliate partnerships. In these instances, we will earn a small percentage of the revenue from sales. There is, of course, no cost to you.
Thank you for all your support! Without you, we could not keep this site running. Gang Gang!
Does Passive Income Impact Social Security Benefits?
Nowadays, having a side hustle or two is common. In some cases, it can even be a necessity in today’s economy. Whatever the reason may be, having a continuous source of passive income is always good. After all, who doesn’t want some extra cash on the side?
Yet you may wonder what kind of repercussions there may be of having one. Perhaps you are concerned about how this may impact your social security benefits. Should you be concerned? Read on to know the relationship between passive income and social security.
Passive income is a general term that covers all income that requires minimal effort. This can be in the form of investments, business interests, and other activities that you can do, even without dedicating your full focus. Once you have one or two of these investments, you need to learn how to manage them. Part of managing them includes knowing how they will affect your taxes and social security.
Social Security is a type of benefits seniors receive after they retire. It comes from the social security tax paid by both employers and employees (including those who are self-employed). Currently, the Social Security tax rate is 12.4%, divided evenly between employers and employees, on a maximum wage base of $137,700.
For seniors enjoying their retirement, the social security benefit is a significant source of income for them. Not everyone is qualified for the social security retirement benefit. To be eligible, you must have worked for a certain minimum amount of time.
The Social Security Administration (SSA) only covers the income from your employment and your results from the retirement earnings test. Other kinds of income — including income from rental properties, lawsuit payments, inheritances, pensions, investment dividends, and interest are not included in their computation. These two kinds of income are also called earned and unearned income.
Earned income comes from employment, work, and self-business activities. It includes things such as salaries, wages, tips, bonuses, commissions, and self-employment income.
On the other hand, unearned incomes are those that come from a passive source of income. Some of the most common forms of passive income are in real estate and income from investments. However, there are also other forms of unearned income. The following list outlines them:
- Interest from bonds or savings accounts
- Dividend payments
- Stock option profits
- Property income
- Lawsuit payments
- Retirement accounts
- Capital gains from the sales of assets
Once you retire, you’ll be relying on your pension and/or social security benefits – another form of passive income. Knowing the different types of income helps file your taxes and if you’re planning to have an Individual Retirement Account (IRA).
Taxation differs for both earned income and unearned income due to their qualitative differences. However, tax rates will vary among several sources of unearned income.
How does unearned income translate to your social security?
The SSA only affects your earned income. If you decide to begin your Social Security benefits early, you will have limits in the returns you will receive. In 2020, the retirement age is 66, and it is gradually rising to 67. If you choose to claim your benefits before your full retirement age, Social Security withholds $1 in benefits for every $2 earned above the annual limit of $18,240.
All your salary together with work-related bonuses and awards contribute toward that limit.
The earnings cap goes away after full retirement age — from then on, the income level does not affect Social Security benefits. Note also that a different formula applies for the year a beneficiary reaches full retirement age.
One thing you must also remember is to report any changes in your earned income to the SSA. Your Social Security benefits are adjusted every year based on your anticipated earnings. Any changes to it might affect the number of benefits you will receive. Fortunately, you don’t lose your Social Security benefits due to changes in earnings. Instead, they are only deferred.
On the other hand, unearned income does not count toward the income limit. Moreover, they also do not lower your monthly payments.
How much can you get from Social Security?
In January 2018, the average retired worker was estimated to receive a monthly benefit of $1,404. This is according to the Social Security Administration. However, it’s possible to get much more by either delaying your retirement or by earning a relatively high salary throughout your career.
For a newly retired worker at their full retirement age, the maximum monthly benefit they can receive is $2,788. To get this, the worker would need to have earned more than the maximum taxable earnings for at least 35 years. If you decide to delay your retirement to get the maximum benefit, then do so until you’re 70. At 70, you could reach as high as the maximum monthly benefit of $3,790 in 2020.
To get a glimpse of how much you can earn based on your current social security status, you can try calculating it. SSA has an automated Retirement Estimator on its website, which allows you to see your projected retirement benefits.
To access it, you need to create an account and login to their website at www.ssa.gov. The site also shows your annual Social Security statement. A portion of your yearly report reveals your Social Security benefit projection based on your actual work history, in addition to other valuable information such as eligibility and estimates for disability and survivors’ benefits.
Take note, however, that if you’re still working and haven’t claimed your Social Security retirement benefit yet, there’s no way to tell you with 100% accuracy how much you’ll get.
Other types of Social Security benefits
Social Security isn’t just retirement benefits. SSA offers other benefit programs that continuously proves to be useful to its recipients. It includes the following benefits:
- Survivors’ benefits provide income to a deceased worker’s spouse and dependents.
- Disability benefits (SSDI) provides income to eligible workers who become disabled and can no longer work.
- Spousal benefits provide retirement income to seniors who earned relatively little throughout their lifetime. It guarantees the lower-earning spouse in a married couple at least half of the primary earner’s full retirement benefit, at their own full retirement age.
- Supplemental Security Income (SSI) provides additional income to disabled or retired individuals with limited assets and income.
So Does Passive Income Matter?
Thankfully, your passive income today won’t affect your social security benefits. The Social Security Administration will not count your “investments” even if the profit from these investments is bigger than your actual salary. In other words, it doesn’t matter if your passive income sources are paying you $1,000, $10,000 or even $1 million per month. If you don’t have income from a job or a business you actively participate in, your Social Security benefits won’t be reduced.
What else should you be concerned about?
Now that you’re cleared with SSA, you must also consider your Internal Revenue Service (IRS). IRS takes note of your gross income, a sum of your earned income from work and/or self-employment as well as investment income, other unearned incomes, and tax-free interest. This is where your passive income comes in. Having a high investment income increases your gross income. If you have too much gross income, your retirement benefits can become taxable.
Like the Retirement Estimator of SSA, IRS also has a way for you to determine if your gross income will affect your Social Security retirement benefits. You can do this by dividing your annual benefits in half and adding the result to other gross income.
Cases may vary depending on your marital status. If you’re married and file a joint return, some of your Social Security may be taxable if the total exceeds $32,000. On the other hand, the threshold can be at $25,000 if you file as any of the following: single, head of household, as a qualifying widow or widower, or when you are married and file a separate return but don’t live with your spouse. Lastly, if you are married, file separately and live with your spouse for any part of the year, the threshold is zero.
Should I continue having a passive income?
That would be a resounding yes. Today is the best time to create your own passive income source. After all, it has become especially easier now to have one. Technology has ushered in different opportunities for people to take control of their own money. There are even several mobile apps that offer you money while doing the smallest of tasks.
Evidently, you don’t need to have a huge capital to start having a passive source of income. There are multiple ways to create passive income without money. With the world being more connected today, having a side hustle or two is even more convenient. It has become accessible to create additional cash. Sometimes, more than enough to also fund your daily expenses.
As you retire, you won’t only enjoy the benefits of your social security but also the return of your investments from these passive income sources.
To learn more about this topic, you may check out Dan Keppel’s Maximize Your Social Security Benefit and Retirement Income.