Ask the Expert: The Social Security cap

My husband will turn 66 in October. He thought he could apply for Social Security in October and continue working with no earnings penalty. Now he has read that in the year you reach full retirement age, you lose $1 of Social Security benefit for every $3 you earn above $38,880. Must he wait until 2013 to apply for benefits with no penalty?

No. He's right that the earnings test disappears when he turns 66.

The rule is that if you work and collect Social Security, you forfeit $1 of benefit for each $2 you earn above $14,640 -- but only until the year in which you reach full retirement age. In your husband's case, that's 2012. Then you forfeit $1 for each $3 earned above $38,880 until your birthday month, when the penalty disappears and your benefit is recalculated to make up for what you forfeited. For example, let's say you took Social Security at 62 but kept working and forfeited 12 months' worth of benefits. At 66, your recalculated benefit would be the same as if you had applied for Social Security at age 63.

When your husband files for his benefit in October, he should ask the Social Security Administration to look back and see if he's entitled to a discounted benefit for the six months before his application. For example, let's say he earns $68,880 in 2012 before October. That's $30,000 above the $38,880 annual cap, so in that nine- month period, he'd forfeit $10,000 of benefits -- $1 for each $3 above the limit. But if his monthly benefit is $2,000 -- i.e., $18,000 for the nine months before October -- he'll still be entitled to keep $8,000 of it.

The bottom line The Social Security earnings cap disappears when you reach your full retirement age.

Websites with more information 1.usa.gov/IoylwB and bit.ly/36vnwX