When planning your FERS retirement, it’s important to understand how the Social Security Maximum Taxable Earnings Cap affects you during your working years and down the road when you separate from service.
Let’s Start With Some Basic Background
Also known as the wage base, the earnings cap is the maximum amount of your earnings that are subject to Social Security taxes. Set by the OASDI program, the limit usually rises each year due to changes in the national average wage index.
This payroll tax contributes about 90% to the total revenue the Social Security program collects per year. It’s estimated that only 6% of workers actually reach the tax cap each year. As a result, 94% of workers won’t be affected by the increase for 2024.
How The 2024 Tax Limit Increase Affects Your Paycheck
In 2024, the maximum earnings subject to Social Security taxes has been increased from $160,200 to $168,600. This means workers will contribute 6.2% of their earnings to Social Security until their income exceeds $168,600 in 2024. Those who earn more than the taxable maximum will not have those earnings taxed by Social Security.
In general, federal workers pay 6.2% % of their earnings into Social Security while their agency pays the same 6.2% on their behalf until their salary exceeds the taxable maximum. Let’s crunch the numbers: if your wages hit $168,600 in 2024, you’ll contribute $10,453.20 to the Social Security program and your agency will contribute the same amount.
“Of course, once you start collecting Social Security, up to 85% of your benefit is subject to federal taxes.“
How The Tax Limit Affects Your Retirement Benefit
Though raising the Social Security tax cap means you’ll be paying more taxes when your earnings reach the limit, there is some good news. The same annual limit applies when the Social Security Administration calculates your benefit for retirement. This means high earners can look forward to a larger Social Security check in retirement.
Since Social Security sets a maximum wage base on your earnings subject to the payroll tax, it also limits how much you can receive monthly in retirement. If you’re planning on filing for Social Security in 2024, the maximum possible monthly benefit for a worker retiring at their Full Retirement Age (FRA) – also known as Normal Retirement Age (NRA) — is $3,822.
Of course, once you start collecting Social Security, up to 85% of your benefit is subject to federal taxes. This is yet another reason why tax planning for retirement is crucial for high earners. Partner with an FRC® trained advisor who can recommend a knowledgeable tax professional.
Source: https://www.ssa.gov/news/press/factsheets/colafacts2024.pdf
