Social Security earnings limit confusion - Do 401K withdrawals count towards income threshold before FRA?
I'm so confused about the SSA earnings limit after talking with my financial advisor yesterday. I started collecting Social Security in July 2024 (6 months before my full retirement age). I know there's an income limit before reaching FRA, but I'm not clear if it only applies to wages or if retirement account withdrawals count too. I've already taken about $22,000 from my 401K this year, and I might need another $10,000 before year-end. Plus I made about $14,000 in part-time consulting work. Does this put me over the threshold? My FRA is in April 2025, and I'm worried about penalties or having to pay back benefits. My friend insists 401K withdrawals don't count toward the earnings test, but my tax guy seemed less certain. Can someone clarify what actually counts as "earnings" for the SSA limit?
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Niko Ramsey
You're in luck! The earnings test ONLY applies to earned income - wages or self-employment income. Your 401k withdrawals are NOT counted as earnings for Social Security purposes, regardless of how much you withdraw. Only the $14,000 in consulting work counts toward the 2024 limit (which is $22,320 if you're reaching FRA in 2025). Since you're under that threshold with just your earned income, you won't face any benefit reductions. This is a common source of confusion since 401k withdrawals are taxable income, but they're not earned income for the SSA earnings test.
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Anna Kerber
•Thank you so much for clearing that up! So relieved to hear this. Do you know if IRA withdrawals follow the same rule? And does this change at all once I reach my FRA in April?
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Seraphina Delan
i went thru this last yr too, ur fine with 401k $$$. only the work money counts and urs is under the limit anywyas. once u hit FRA in april the limits GONE completely so u can make milions and SS don't care lol
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Anna Kerber
•That's a relief, thanks! So after April 2025, I can earn as much as I want without any reduction in benefits? That'll make planning a lot easier.
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Jabari-Jo
My sister got BURNED by this last year!! She thought the same thing and didn't realize her side business counted, but dividends and 401k didn't. SSA made her pay back $4,600!!! Make sure you're counting ALL your self-employment income from that consulting work. If you're close to the limit be super careful.
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Niko Ramsey
•This is an important point. For the original poster, though, $14,000 in consulting income is well below the $22,320 limit for 2024 when you're reaching FRA in 2025. But you're absolutely right that ALL self-employment earnings count, including things people sometimes forget like contract work paid via 1099.
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Kristin Frank
Everyone keeps talking about the earnings test limit, but don't forget your 401k withdrawals AND Social Security benefits together might push you into a higher tax bracket and cause more of your SS benefits to be taxed! That's a completely separate issue from the earnings test, but still something to watch.
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Anna Kerber
•Oh great point! I hadn't even considered the tax implications. I'll have to look into how much of my benefits might be taxable with the extra income from withdrawals. Definitely something I need to discuss with my tax advisor.
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Micah Trail
Just want to add another confirmation - 401k, IRA, pension, dividends, capital gains, interest, lottery winnings - NONE of these count for the earnings test. Only wages and self-employment income count. Had to figure this out when I retired at 63 last year. You're good!
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Nia Watson
Something that will help for 2025: the earnings limit is significantly higher in the year you reach FRA. For the months BEFORE you reach FRA in April, the 2025 limit will likely be around $60,000 (final numbers aren't published yet). And as others have mentioned, once you hit your FRA in April, there's no earnings limit at all anymore!
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Anna Kerber
•That's great news! I had no idea the limit went up so much in the year you reach FRA. So even if I pick up more consulting work in early 2025, I should still be well under that higher limit. Thanks for this info!
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Alberto Souchard
I had to deal with this exact situation! I was so frustrated trying to get a straight answer from SSA. I called EIGHT times and kept getting disconnected or told different things each time. I finally used this service called Claimyr (claimyr.com) to get through to an actual SSA agent who confirmed that 401k/IRA withdrawals don't count toward the earnings test. Saved me hours of frustration. There's a video showing how it works: https://youtu.be/Z-BRbJw3puU
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Seraphina Delan
•does that really work?? i gave up calling SSA after spending 3 hrs on hold last month, might try this next time
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Alberto Souchard
•Definitely worked for me! Got through to an agent in about 15 minutes after spending days trying on my own. Totally worth it when you need answers quickly.
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Kristin Frank
The rules are actually different if you're self-employed!!! The SSA looks at how much you're WORKING not just your income if you own your business. So if your consulting is your own business they might count different??? That's what happened to my brother-in-law.
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Niko Ramsey
•There's some truth to this, but it's a bit more nuanced. SSA does consider hours worked for self-employed individuals, but primarily to determine if someone is retired or still actively working. For the earnings test specifically, they still use net profit from self-employment. However, they might scrutinize situations where someone manipulates their income (like deferring payments) to avoid the earnings test while still working substantial hours.
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Anna Kerber
Thanks everyone for your helpful responses! Just to make sure I understand correctly: 1. Only my $14,000 consulting income counts toward the 2024 earnings limit of $22,320 2. My 401K and IRA withdrawals don't count at all for this purpose 3. In 2025, I'll have a much higher limit until April (my FRA), then no limit at all 4. I should still be careful about tax implications This is such a relief. I was worried I might have to pay back some benefits!
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Nia Watson
•You've got it exactly right! And remember that even if you did exceed the earnings limit, SSA wouldn't make you pay back everything - they reduce benefits by $1 for every $2 earned above the limit. But in your case, you're well under the threshold, so no worries there.
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