Social Security earnings limit confusion - does lump sum retirement payout count when under FRA?
My husband turned 62 in January and started taking his Social Security retirement benefits early. We know there's an earnings limit ($22,600 for 2025 I think?) since he's under his full retirement age. He works part-time at a hardware store making about $18,000 a year, so we thought we were safe. Here's where I'm confused - he just got offered a buyout from his old employer's pension plan. They want to give him a one-time lump sum payout of $45,000 from his tax-deferred retirement account. Will this count toward the earnings limit? We weren't planning on this money but it would really help with some home repairs we've been putting off. I'm terrified we'll lose his SS benefits if we accept this payout. Does anyone know if retirement account distributions count toward the earnings limit? Thanks for any help!
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Ravi Gupta
Good news! Tax-deferred retirement account distributions like 401(k)s, IRAs, and pension lump sums do NOT count toward Social Security's earnings limit. Only wages from employment or net earnings from self-employment count. The earnings test (what SSA calls the limit) only applies to "earned income" - meaning actual work you do. Retirement account distributions, investment income, interest, capital gains, and pension payments are all considered "unearned income" and don't affect the earnings test at all. Your husband can take that $45,000 distribution without any impact on his Social Security benefits. Just remember you'll still owe taxes on that distribution (unless it's from a Roth account).
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StarStrider
•Oh thank you so much! That's such a relief to hear. We were really worried about this and our financial advisor is on vacation this week. So to be clear, even though it's a pretty large amount, it won't trigger any review or reduction of his monthly SS benefits? That seems almost too good to be true!
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Freya Pedersen
I don't think thats right actually. My brother took a disbursement from his 401k last year and it totally messed up his ss check. They reduced it for like 3 months after..
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Ravi Gupta
•Your brother's situation was likely different. The SSA is very clear that only earned income counts toward the earnings limit. There might have been other factors at play - perhaps he also had wages that put him over the limit, or there was confusion about the source of funds. Sometimes the SSA makes mistakes too, which can be appealed. Here's the official rule directly from SSA: only wages and net earnings from self-employment count toward the earnings limit. Pension payments, annuities, investment income, interest, capital gains, and other government benefits don't count.
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Omar Hassan
This is a classic case of confusing different Social Security rules! What's happening is: 1. For the EARNINGS LIMIT (when you're working while collecting SS early) - only actual work income counts. Your $45K pension distribution absolutely does NOT count here. 2. For TAXATION of your Social Security benefits - pension distributions DO count as part of your combined income that determines how much of your SS is taxable. 3. For MEDICARE PREMIUMS (IRMAA) - large distributions can push you into higher income brackets for Medicare premium surcharges 2 years later. These distinctions trip up so many people! Accept that pension distribution without worrying about the earnings limit. Just be prepared for potential tax implications.
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StarStrider
•Thank you for breaking this down so clearly! I think we were definitely getting confused between taxation rules and the earnings limit rules. So it sounds like we won't lose any SS benefits, but we might end up paying more taxes on his SS benefits because of the distribution? That's much better than I feared!
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Chloe Anderson
Had the EXACT same situation last year with my wife's retirement payout. SSA doesn't care about retirement distributions for the earnings test. Only W-2 wages and self-employment income matter. BUT be careful - a $45,000 distribution could potentially push you into a higher tax bracket AND might make more of your Social Security benefits taxable. Up to 85% of your benefits can become taxable depending on your combined income. My suggestion? Take the distribution but consider having extra withholding taken out to cover the additional tax liability. We didn't, and ended up owing a lot at tax time!
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StarStrider
•That's really helpful - especially the tip about withholding. I hadn't even thought about that part. We'll definitely talk to a tax person before taking the distribution. Did you have any issues with the SSA questioning the large deposit or anything like that? I'm still a little nervous about triggering some kind of review.
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Diego Vargas
pensions don't count but if u rollover to an IRA ull avoid the tax hit now. just my 2 cents
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Omar Hassan
•This is partially correct but needs clarification. Yes, rolling over to an IRA avoids immediate taxation, but: 1. If this is already a tax-deferred account like a 401(k), it's already tax-deferred whether distributed or rolled over 2. The rollover itself doesn't change anything about the earnings limit (which is the original question) since neither scenario counts as earned income 3. Eventually taxes will be due when withdrawals are made from the IRA It's always good to consider tax implications, but this is separate from the earnings limit question.
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CosmicCruiser
My husband and I went through something similar! We thought EVERYTHING counted toward that stupid earnings limit. Spent weeks worried sick about it! The guy at our local SS office laughed when we finally went in. Said people get confused about this ALL THE TIME. Only actual WORK counts. Pensions, 401ks, stocks, lottery winnings, gifts - NONE of that stuff counts! The only thing that counts is if you're actually working a job or self-employed. Literally paycheck money or business profits! Take the money and enjoy your home repairs!! 😊
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StarStrider
•That makes me feel so much better knowing we're not the only ones confused by all this! It's such a relief. Thank you for sharing your experience - it's exactly what we're going through!
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Anastasia Fedorov
Since tax-deferred retirement distributions don't count toward the earnings test, you're in the clear for accepting that lump sum. But trying to get definitive answers from SSA can be incredibly frustrating. I spent 3+ hours on hold last month trying to confirm a similar question. I finally used a service called Claimyr (claimyr.com) that got me connected to a real SSA agent in under 15 minutes. They have a video showing how it works: https://youtu.be/Z-BRbJw3puU It was worth it to get an official answer directly from SSA rather than relying solely on forum advice. The agent confirmed exactly what others here have said - retirement distributions don't count toward the earnings limit at all.
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Chloe Anderson
•I've used this service too - absolute game changer for dealing with SSA. Before finding it, I'd waste entire mornings on hold only to get disconnected. Getting official confirmation directly from SSA gives such peace of mind, especially with complicated situations like earnings limit questions.
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Freya Pedersen
My aunt just got a big inheritance and it didnt effect her ss checks at all so i think ur probly fine
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Omar Hassan
•You're right that inheritances don't affect Social Security benefits under the earnings limit, but it's important to understand that's because inheritances (like pension distributions) are not earned income. The earnings limit only applies to wages from actual work or self-employment income. Inheritances, lottery winnings, gifts, investment income, pension distributions, and retirement account withdrawals are all examples of unearned income that don't count toward the earnings limit. This is consistent with what others have explained about the pension distribution in the original post.
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Sean Doyle
THE SSA EARNINGS LIMIT IS A SCAM!!!! They STEAL money from seniors who are just trying to survive!!! I lost $4700 last year because I went over by just $1200!!! The whole system is RIGGED to keep us POOR and DEPENDENT!!! And don't believe anyone who tells you they don't look at other income - they look at EVERYTHING. I had a friend who sold his house and they counted that profit against him!!! THIEVES!!!
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Omar Hassan
•I understand your frustration, but there seems to be some misunderstanding here. The earnings limit is applied according to specific rules: 1. If you exceed the annual limit, benefits are reduced by $1 for every $2 earned above the limit (not dollar-for-dollar) 2. Only earned income counts - wages and self-employment 3. The SSA cannot and does not count home sale profits toward the earnings limit If your friend's benefits were affected after selling a home, it was likely due to something else entirely, or possibly a mistake that could be appealed. The rules about what counts toward the earnings limit are very specific and clearly documented by SSA.
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StarStrider
Thank you all so much for the helpful responses! After reading everything, I feel much more confident that we can accept this pension distribution without affecting my husband's Social Security benefits under the earnings limit rules. I'll still keep an eye on his part-time job wages ($18,000) to make sure that stays under the $22,600 limit for 2025. And we'll talk to our tax advisor about the potential tax implications of the distribution - especially how it might affect the taxation of his SS benefits. Really appreciate everyone taking time to help clarify this confusing topic!
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Amina Sy
You've gotten excellent advice here! Just wanted to add one small clarification that might be helpful - when you mention the $22,600 earnings limit for 2025, that's correct for most people under full retirement age. But if your husband reaches his full retirement age during 2025, there's actually a higher limit ($59,520 for 2025) that applies only to earnings in the months before he reaches FRA, and then no limit at all after that month. Since he turned 62 in January, he's probably got a few more years before FRA, but it's worth keeping in mind for future planning. The pension distribution is definitely safe to take - enjoy those home repairs!
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