401k contribution and Social Security income threshold
I was recently asked by a client who is currently receiving social
security the following question. He is still working and wants to know if he can increase his income and use it to contribute
the maximum to his 401K so that the net income is either just at or below the maximum level that would allow his social security to not be reduced. Or does the threshold amount only apply to the gross amount earned?
Permalink Submitted by Alan Spross on Wed, 2008-11-19 20:53
Good idea, but as you indicated the gross amount of wages applies here.
For purposes of the earnings test, wages used are the same as those defined as social security wages. Gross wages are subject to SS tax before 401k deferrals, therefore increasing 401k deferrals will not reduce the social security wages on which the earnings test is based.
A FSA contribution or pre tax health insurance and certain other fringe benefits that are not subject to SS taxation may be used for this purpose.
However, note that many people do not realize that in exchange for the earnings test reduction in benefits, their early filing penalty is reduced allowing them larger benefits for life. Of course, the loss of current benefits is immediate and the enhanced benefits are deferred over their lifetime.
SS Earnings Max for 2008 is 13,560. For 2009 it rises to 14,160.