If you’re nearing retirement or already collecting Social Security benefits, you might be considering ways to minimize the impact of the earnings limit on your benefits. One common question is whether putting a significant portion of your income—say, 85%—into a 401(k) plan will allow you to bypass the Social Security earnings limit. Unfortunately, the short answer is no. The Social Security earnings limit is calculated based on your gross income before deductions like 401(k) contributions, so diverting your income into a retirement account will not exempt you from the limit.
In this article, we’ll explore how the Social Security earnings limit works, why 401(k) contributions don’t reduce it, and what strategies you can use to manage your income while collecting benefits.
Understanding the Social Security Earnings Limit
The Social Security earnings limit applies to individuals who are:
- Receiving Social Security benefits, and
- Under their full retirement age (FRA).
The purpose of this limit is to reduce Social Security benefits for those who continue working and earning a significant income while also collecting benefits.
The 2025 Earnings Limit
- If you are under your FRA for the entire year, the limit is $21,240. For every $2 you earn over this limit, $1 is withheld from your Social Security benefits.
- In the year you reach your FRA, the limit is much higher—$56,520 in 2025. During this period, $1 is withheld for every $3 you earn over the limit, but only until the month you reach your FRA.
- After reaching your FRA, there is no earnings limit, and you can earn as much as you like without affecting your Social Security benefits.
How 401(k) Contributions Affect the Earnings Limit
Contributing to a 401(k) is a great way to save for retirement and reduce your taxable income. However, these contributions do not impact the Social Security earnings limit. This is because Social Security calculates the earnings limit based on your gross earnings—the total income you earn from work before any deductions.
Example Scenario
Let’s say you earn $50,000 annually and decide to contribute 85% of your income, or $42,500, into a 401(k). Your take-home pay would be much smaller, but for Social Security’s purposes, your gross earnings would still be $50,000. Since the earnings limit for 2025 is $21,240, Social Security would count your income as exceeding the limit by $28,760. As a result, $1 in Social Security benefits would be withheld for every $2 of that excess, meaning you would lose $14,380 in benefits.
In other words, your contributions to a 401(k) reduce your taxable income, not your Social Security earnings for the purpose of the earnings limit.
Why Social Security Uses Gross Income
The Social Security Administration (SSA) uses gross income to determine your earnings because it reflects the total compensation for your work, regardless of how much you set aside for retirement or other deductions. This ensures consistency in the earnings test and prevents individuals from bypassing the limit by sheltering income.
Additionally, withdrawals from your 401(k) or other retirement accounts do not count toward the earnings limit. The earnings limit applies only to income earned from work, such as wages or self-employment income, not to passive income or retirement withdrawals.
Strategies to Manage the Social Security Earnings Limit
If you’re concerned about exceeding the earnings limit while collecting Social Security benefits, there are alternative strategies to consider:
- Delay Claiming Social Security Benefits
- If you’re still working and under your FRA, consider delaying your Social Security benefits. Waiting will prevent your benefits from being reduced by the earnings limit and may increase your monthly benefit amount due to delayed retirement credits.
- Reduce Your Work Hours or Earnings
- To stay under the earnings limit, you might opt to work fewer hours or take on part-time work. This allows you to keep more of your Social Security benefits.
- Coordinate Your Retirement Timing
- If you’re close to reaching your FRA, you might consider delaying your Social Security benefits until you pass the earnings limit threshold for your FRA year.
- Leverage Retirement Savings
- Instead of earning more wages, consider using your 401(k) or other savings to supplement your income. Retirement account withdrawals are not counted toward the earnings limit.
- Work After Reaching Full Retirement Age
- Once you reach your FRA, the earnings limit disappears, allowing you to work and earn as much as you like without affecting your Social Security benefits.
Conclusion
Putting 85% of your income into a 401(k) is an excellent way to reduce taxable income and save for retirement, but it won’t help you avoid the Social Security earnings limit. The SSA uses your gross earnings, not your net income, to determine whether you exceed the earnings limit.
If you’re planning to work while receiving Social Security benefits, it’s essential to understand the rules surrounding the earnings limit and how it might impact your monthly checks. By delaying benefits, managing your earnings, or using retirement savings, you can navigate this period more effectively. The key is to stay informed and plan your retirement strategy accordingly.
FAQs
1. Do 401(k) contributions reduce my Social Security earnings for the limit?
No, the SSA uses your gross income, not your net income after 401(k) contributions, to calculate the earnings limit.
2. What income counts toward the Social Security earnings limit?
The earnings limit applies to wages and net self-employment income. Income from pensions, 401(k) withdrawals, or investments does not count.
3. Can I contribute to a 401(k) and still receive Social Security benefits?
Yes, you can contribute to a 401(k) while receiving Social Security benefits, but the contributions won’t affect the calculation of the earnings limit.
4. What happens if I exceed the earnings limit?
If you earn more than the limit, Social Security will withhold a portion of your benefits—$1 for every $2 (or $3, depending on your age) you earn over the limit.
5. How can I avoid losing benefits due to the earnings limit?
You can delay claiming Social Security benefits, reduce your earnings to stay under the limit, or wait until your full retirement age, when the earnings limit no longer applies.