Social Security recipients will get slightly bigger checks in 2013. The Social Security Administration also recently announced several other ways the program will be tweaked in the coming year. Here’s a look at the Social Security changes workers and retirees will experience next year:
Bigger monthly payments. Social Security payments will increase by 1.7 percent in 2013. That’s considerably less than the 3.6 percent cost of living adjustment retirees received in 2012. Social Security payments are adjusted each year to reflect inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers. Previous inflation adjustments have ranged from zero in 2010 and 2011 to 14.3 percent in 1980. The average Social Security check is expected to increase by $21 as a result of the change from $1,240 before the cost of living adjustment to $1,261 after. Couples will see their benefit payments grow from an average of $2,014 to $2,048.
Payroll tax cut scheduled to expire. Workers will pay 6.2 percent of their income into the Social Security system in 2013, up from 4.2 percent in 2012. The temporary payroll tax cut expires at the end of December 2012 under current law.
Higher Social Security tax cap. The maximum amount of earnings subject to Social Security taxes will be $113,700 in 2013, up from $110,100 in 2012. Approximately 10 million people will pay higher taxes as a result of the increase in the taxable maximum.
Increased earnings limit. Retirees who work and collect Social Security benefits at the same time will be able to earn $480 more next year before any portion of their Social Security payment will be withheld. Social Security recipients who are younger than their full retirement age (66 for those born between 1943 and 1954) can earn up to $15,120 in 2013, after which $1 of every $2 earned will be temporarily withheld from their Social Security payments. For retirees who turn 66 in 2013, the limit will be $40,080, after which $1 of every $3 earned will be withheld. Once you turn your full retirement age you can earn any amount without penalty and collect Social Security benefits at the same time. At your full retirement age your monthly payments will also be adjusted to reflect any benefits that were withheld and your continued earnings.
Maximum possible benefit grows. The maximum possible Social Security benefit for a worker who begins collecting benefits at their full retirement age will be $2,533 in 2013, up from $2,513 per month in 2012.
Paper checks will end. The U.S. Treasury will stop mailing paper checks to Social Security beneficiaries on March 1, 2013. All federal benefit recipients must then receive their payments via direct deposit to a bank or credit union account or loaded onto a Direct Express Debit MasterCard. Retirees who do not choose an electronic payment option by March 1 will receive their payments loaded onto a pre-paid debit card. Most people already receive their benefit payments electronically, and new Social Security recipients have been required to choose an electronic payment option since 2011.
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A Retirement Timeline
While people pay back their loans, they usually stop contributing to their retirement plans. They lose the power of compounding over time that is key to making savings grow.
Loans are paid back into a 401(k) with after-tax money, which ends up getting taxed again when it's withdrawn at retirement. Here's an example: Someone borrows $2,000 from their 401(k). Let's assume their combined state and local income tax rate is 25%. Since the original contribution went into the plan pre-tax, their take home pay was only reduced by $1,500 to contribute that $2,000 into the plan. They will have to repay that loan with after-tax dollars ($2,000 in take home pay.) When they retire, they will have to pay tax on the withdrawal at ordinary income tax rates. So, they paid tax to put money back into the plan to repay their loan, and they will pay tax on that same money when they withdraw it at retirement.
Job Loss Means Immediate Payback
If you leave your job for any reason while you're paying back the loan, the full amount is due very quickly, sometimes as soon as 30 days.
Watch Out For Creditors
Money in a 401(k) plan is safe from creditors. Once you take it out of the plan, creditors can get at it.