Considering Going Back to Work? Watch Out for These 2 Things if You're on Social Security.

Retirees considering re-entering the workforce to supplement a modest 2.8% Social Security cost-of-living adjustment (COLA) must navigate two critical financial considerations. First, the Social Security earnings test can temporarily reduce benefits if income exceeds specific thresholds (e.g., $23,400 or $62,160 in 2025, depending on age relative to Full Retirement Age), though withheld amounts are eventually recouped. Second, federal and some state taxes apply to Social Security benefits once provisional income surpasses unindexed thresholds ($25,000 for single, $32,000 for married), potentially increasing tax burdens over time, with Roth savings withdrawals offering a potential mitigation strategy.

Analysis

The 2026 Social Security cost-of-living adjustment (COLA) of 2.8%, equating to approximately $56 per month for the average check, is prompting retirees to consider re-entering the workforce to supplement income. This modest increase, coupled with rising costs, highlights the financial pressures on retirees. However, re-employment introduces complexities related to Social Security benefit management.

A significant consideration is the Social Security earnings test, which temporarily reduces benefits for those under Full Retirement Age (FRA) if earnings exceed specific thresholds. In 2025, individuals under FRA all year face a $1 reduction for every $2 earned over $23,400, while those reaching FRA that year lose $1 for every $3 over $62,160. These limits are set to increase to $24,480 and $65,160, respectively, in 2026, but the withheld benefits are eventually recouped through a recalculated, higher benefit upon reaching FRA.

Further complicating matters, federal and some state governments tax Social Security benefits once provisional income surpasses unindexed thresholds, such as $25,000 for single filers and $32,000 for married couples. As these thresholds are not inflation-adjusted, a growing number of retirees face benefit taxation, potentially up to 85% of their benefits. Utilizing Roth savings withdrawals can mitigate this impact, as they typically do not count towards provisional income.

Key Decisions for Investors

• Investors considering returning to work should meticulously assess the Social Security earnings test thresholds and potential benefit reductions, understanding that while benefits are eventually recouped, short-term cash flow may be impacted.
• Proactively plan for federal and state taxation of Social Security benefits by understanding provisional income limits, and consider leveraging Roth savings withdrawals to minimize taxable income.
• Seek guidance from a financial advisor or tax accountant to model the combined impact of earnings, benefit withholding, and taxation on overall retirement income, ensuring informed decisions.