Deferred pay and PIA

[SilentWalker]

I am 56 and starting preparations to take early retirement in 14 months, around the time I turn 58. I will have only 26 years of FICA payments at the time of my RE, so I am trying to figure out how much will my SS PIA be reduced due to ER. The area of uncertainty to me is the impact of various post retirement income.
1. Unqualified deferred pay will be paid to me over 20 years post retirement. This is all taxed as regular income including FICA tax.
2. I will continue annual stock option exercises through 8 years post retirement (regular FICA taxable income)
3. I can start taking my defined pension some time between age 60 and 65. The pension will be 80% qualified and 20% non-qualified, which means the 20% is FICA taxable.

So here is my question: Since I will have some FICA taxable income every year through my entire retirement, does that mean that I keep adding more social security credits based on the annual FICA taxes, even though I am not actually working for that income any more? And if the answer is yes, is there a point when I stop getting social security credits, e.g. do I still get SS credits from my FICA taxes during the years when I am already taking SS?

 

[teej1985]

If you have 35 years of earnings and the latest year is lower than your 35th lowest inflation adjusted year, it would have no impact.

Copy and paste your historical earnings record into ssa.tools and play with it.

 

[SilentWalker]

If you have 35 years of earnings and the latest year is lower than your 35th lowest inflation adjusted year, it would have no impact.

Copy and paste your historical earnings record into ssa.tools and play with it.

That's useful to know. You did not directly answer the other part of my question, so am I understanding correctly that SSA does not really care if I am still employed and actually working for the FICA taxable income? I will have another 9 years to go after retirement to have the full 35 years of earnings. I can pattern my deferred pay and option exercises so that I will be at maximum SS taxable amount for those 9 years, if this is how it works.

 

[braumeister]

That's useful to know. You did not directly answer the other part of my question, so am I understanding correctly that SSA does not really care if I am still employed and actually working for the FICA taxable income? I will have another 9 years to go after retirement to have the full 35 years of earnings. I can pattern my deferred pay and option exercises so that I will be at maximum SS taxable amount for those 9 years, if this is how it works.

My understanding is that whether you're working or not is irrelevant. What matters is whether your income is considered "earned" or not. If you're paying FICA tax on it, then I think it is.

Social Security is based on your 35 highest earning years.

 

[chassis]

Are stock options and payments from deferred compensation programs considered "wages"? To my knowledge this is what triggers reduced SS benefits.

Stock options are treated as wages per this: https://www.bea.gov/index.php/system/files/papers/P2000-6.pdf

Read here about non-qualified deferred comp plans: https://www.investopedia.com/articl...ualified-deferred-compensation-plans-work.asp

For example, capital gains and interest do not reduce SS benefits. Your company's benefits people should be able to either answer your questions, or refer you to people that can.

 

[teej1985]

I'm not certain that the Non-Qualified Pension Deductions would be considered deferred wages. Are you sure you didn't already pay FICA taxes on them?

so am I understanding correctly that SSA does not really care if I am still employed and actually working for the FICA taxable income?

If you claim SS ebfore your FRA, your benefits could be reduced because of earned income, they don't care about it after your FRA, and you could work until your 100, you would still pay the FICA taxes on your wages even though you are already collecting benefits and it has no impact on your benefits.

 

[SilentWalker]

I'm not certain that the Non-Qualified Pension Deductions would be considered deferred wages. Are you sure you didn't already pay FICA taxes on them?

Very good point. According to my 2020 W2 I did pay medicare tax for the part of the compensation that went to the non-qualified rabbi trust (#1 in my OP). So even though I did not pay SS tax from it being over the max already, that part was FICA taxed.

The top 20% of my DB pension (#3 in my OP) will be FICA taxed during retirement, as that is actually stated in my pension statements. My stock options (#2) have always been FICA taxed at the time of exercise, so I it seems that I will continue getting SS credits for the options and part of the pension but not for the deferred pay that is in the rabbi trust.

 

[bada bing]

I doubt your NQDC is considered "earned" income and subject to FICA tax. I have about 1 years earnings in NQDC that I elected be paid in a lump this fall. NO FICA.

As far as structuring your earned income for FICA taxes, I am guessing that many (all) of your 26 years are over the annual FICA cap ? With respect to eventual SS benefits, it would be useful to know if you are already paid in past the second bend point. If you are past the second bend point, then strategies to get more FICA credits are less advantageous. If you can bunch the income received to be above the annual FICA cap, you will save FICA taxes on the portion over the cap but at the expense of being in a higher fed income tax bracket. You are going to pay the tax man no matter what. I am guessing that getting at least the 9 years you are currently missing as FICA cap income years would be advantageous, if you can bunch the income to make it happen.

Key concepts are that SS benefits are calculated on top 35 years only, The FICA cap is a partial offset for progressive income tax rates on earned income. And that the SS benefit formula is extremely progressive in that you get little credit for taxes paid in past the second bend point.

 

[Perryinva]

As stated, once the top 35 top years are reached, there is very very little difference. But remember it is when ADJUSTED years are reached. A lower earlier year can easily be higher for the calculations than a much higher current year. On my chart, making 50k early in my career was worth as much as $120k at the end. Unfortunately, SSA ceased providing the chart that showed the multiplier for each year to calculate your lifetime adjusted earnings manually, so it is difficult to determine if a newer year will replace a lower year if you are always near max SS income. If you have always been at max, don’t give it any thought. All that really matters is 35 years well above the 2nd bend point. Once within a few thousand in come close to the max, the difference in benefits is negligible.

If you are replacing lower years with higher ones during ages above 62, whether you have filed or not, your benefit will be recalculated each year. However, once you reach 62, no more inflation adjustments are made to previous years, and all years qualified earnings from age 62 and older carry a multiplier of “1”.

Naturally, if the qualified income triggers preFRA benefit penalties, it makes no sense to file until FRA or later.

 

[Backpacker]

https://www.ssa.gov/oact/cola/awifactors.html
I think this is the link to generate a table of the income adjustment factors.