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Maximizing Your Social Security Benefits with Stock Compensation

Maximizing Your Social Security Benefits with Stock Compensation

June 06, 2023

Social Security is a secure way to guarantee a comfortable lifestyle after retirement. In an era where most retirees are worried about outliving their retirement savings, maximizing the benefits can be handy.

There are generally 3 common ways to maximize your social security benefits:

  • Work longer (more than 35 years)
  • Increase your contribution to the scheme
  • Delay withdrawal of your benefits until 70 years

One of the ways you can delay claiming your benefits is by using nonqualified stock options (NQSOs) or restricted stock/RSUs. This blog post will guide you through the ins and outs of stock compensation to maximize your earnings.

What Is FRA and How Does It Impact Social Security Benefits?

The full retirement age (FRA) affects the amount you receive from Social Security Administration (SSA). According to the regulator, the FRA for individuals born between 1943 and 1954 is 66 years. The age increases gradually for those born between 1955 and 1960.

If you were born after 1960, the full retirement benefits can be claimed after you turn 67. Although SSA puts this as the minimum age to claim your benefits, you can delay the withdrawals.

Delaying your Social Security benefits increases your earnings by 8% every year. However, after getting to 70, you’re not eligible for the benefits.

If you don't have another source of income, it isn't easy to take advantage of the growth of your contributions. Let's explore how you can use equity compensation to maximize your benefits.

How Does Stock Compensation Help Maximize Social Security Benefits?

When you take your Social Security benefits a year after your FRA, you increase the amount by 8%.

Example: Let's say at the age of 67, you have $10,000 in your SSA account. If you delay your claim for one year, you will receive $800 more. If you wait 3 years, the amount will be $2400 more.

Income from your equity compensation helps you delay your claim and maximize the SSA benefits.

If you decide to withdraw your benefits before the FRA, Social Security Administration reduces any income above the annual limit using a complex formula. However, the earnings are restored upon reaching the full retirement age.

In 2023, the annual earnings limit for people under full retirement age is $21,240, while for those at full retirement age is $56,520. Any earnings above these limits are reduced by $1 for every $2 you earn above the limit.

To avoid the limit hurdle on your stock compensation, you should receive them before retirement as compensation for services rendered. This approach cushions you from the annual earnings limit.

Social Security Taxes

Taxes are always an issue when it comes to equity compensation and social security benefits. You should pay taxes on all social security benefits and stock grants, regardless of age. However, incentive stock options don't attract these taxes.

When your extra earnings are substantial, they boost your monthly benefits. However, this only happens if the earnings in or after the FRA are more than those of earlier years for which they may be substituted.

Another aspect you need to consider is taxation if your earnings are beyond a certain limit when you start claiming your Social Security benefits. If your earnings from other investments are above $44,000 as a couple filing jointly or over $34,000 for singles, you must include 85% of your SSA benefits in the taxable income.

As always, consult with a tax professional, as well as a financial professional, before making any financial decisions.