Many seniors look forward to claiming Social Security, but the timing can create unexpected tax issues. Starting benefits at age 62 may provide extra income sooner, yet working at the same time can trigger rules that reduce payments temporarily.
However, the good news is that careful planning can help seniors keep more of their money. Understanding Social Security rules, using retirement accounts wisely, and choosing tax-friendly investments can make a major difference.
Understand How Working Affects Social Security Benefits
Tim / Pexels / Claiming Social Security at 62, while continuing to work, can create a financial challenge because of the ‘earnings test.’
This rule applies to people who have not reached Full Retirement Age, which is usually age 67 for most Americans.
In 2026, workers under Full Retirement Age can earn up to $24,480 before Social Security starts withholding benefits. For every $2 earned above that limit, the Social Security Administration withholds $1 in benefits. The reduction can surprise retirees who expect to receive their full monthly payment while earning wages.
The rules change during the year someone reaches Full Retirement Age. In 2026, the earnings limit for the months before reaching that milestone is $65,160. The penalty becomes $1 withheld for every $3 earned above that amount.
Once a person reaches Full Retirement Age, the earnings limit disappears completely. Social Security benefits are no longer reduced because of wages or self-employment income. The withheld benefits are also not simply lost forever.
The Social Security Administration recalculates benefits after Full Retirement Age. People receive credit for months when benefits were withheld, which can increase their future monthly payments. This makes early claiming a decision that requires careful planning instead of a simple age-based choice.
Use Retirement Accounts to Lower Your Tax Bill
Many seniors focus on avoiding taxes on investment gains, but reducing taxable income often starts with retirement accounts. The income used to calculate Social Security taxes includes more than just wages, so lowering adjusted gross income can help protect benefits from taxation.
Workers who still have access to retirement plans can use accounts such as a 401(k) or a traditional IRA. Contributions to these accounts may reduce taxable income because they are often made with pre-tax dollars.
Lowering adjusted gross income can also affect how much of Social Security becomes taxable. Depending on combined income levels, seniors may have to pay federal income tax on part of their benefits. Some retirees may pay taxes on up to 50% or 85% of their Social Security income.
Self-employed workers have additional options. A SEP IRA or Solo 401(k) can help business owners save for retirement while reducing current taxable income. These accounts allow money to grow without creating an immediate annual tax bill.
Choose Investments That Create Fewer Taxes
Karola / Pexels / Money outside retirement accounts requires a different approach. Some investments create yearly taxable income, which can increase a retiree’s tax bill and potentially make more Social Security benefits taxable.
High-yield bonds and certain actively managed funds may produce regular income or frequent capital gains. Those earnings can add to taxable income every year, even when the investor does not need the money for living expenses.
Tax-efficient investments can provide more flexibility. Low-turnover index funds and exchange-traded funds, commonly known as ETFs, often create fewer taxable events because they do not frequently buy and sell investments.
Long-term investors can also benefit from controlling when they sell assets. Capital gains taxes usually apply when an investment is sold, allowing retirees to decide when to recognize profits.
A senior who delays selling profitable investments may have more control over future tax years. Selling during a year with lower income could result in a smaller tax bill compared with selling during a year with higher earnings.
