Retirement isn’t what it used to be. Instead of leaving the workforce at age 65 and hitting the golf course every day, many retirees are going back to work. According to a recent Longevity Alliance and Harris Interactive poll, 43 percent of surveyed retirees seriously considered re-entering the workforce shortly after they had left their companies.
Many people need to keep working for financial reasons, but some are choosing to continue to work in an entirely new career. Regardless of the reason, it’s important for people to understand how going back to work might impact their retirement benefits and taxes.
Individuals thinking about rejoining the workforce after retiring need to first understand how Social Security benefits, health insurance, and taxes will be affected so they don’t lose benefits or end up in a higher tax bracket.
Social Security benefits
If you’re 62 or older, you may have already decided to start receiving Social Security retirement benefits. If you get a new job to increase your income, you may be out of luck. You’re required to notify the Social Security Administration, and if you’re not yet at full retirement age (as defined by the SSA), your benefits may be reduced if you earn more than the annual income limit (which is $15,120 in 2013). Generally, for every two dollars you earn above the annual limit, your benefits are reduced by one dollar.
The SSA full-retirement age has been gradually increasing, and now ranges from 65 to 67 years old, depending on the year you were born. (It is 67 for everyone born in 1960 and later.)
If you’re at the year when you’ll reach your full retirement age, but haven’t had your birthday yet, your benefits will decrease, but not by as much. They’ll be reduced by one dollar for every three dollars you earn above the annual limit ($40,080 in 2013), until your birthday.
You can estimate how much your annual benefits will be reduced by using the SSA’s Retirement Earnings Test Calculator. The SSA also has How Work Affects Your Benefits, which is available online as a PDF.
Once you reach full retirement age, your benefits will not be reduced, no matter how much money you earn.
If you return to work after you start receiving benefits, you may be able to receive a higher benefit based on those earnings. The SSA automatically re-computes your benefit amount after additional earnings are credited to your earnings record, and will reset your benefits to a higher number based on your current age and past earnings.
Going back to work might mean more money, but it also could bump you into a higher tax bracket. In addition, extra distributions or benefits received on top of your salary may count as additional income. Taking pension distributions on top of a regular salary, or by collecting Social Security benefits while continuing to work, could result in higher taxes. Crunch the numbers to see how close your current income is to the next tax bracket.
Health insurance is one of the biggest reasons many people under age 65 stay in, or return to, the workforce. If you’re 65 or older and already covered by Medicare, check with your employer’s human resources department about how its insurance coverage would work with your Medicare. You can also read Medicare’s publication Medicare and Other Health Benefits: Your Guide to Who Pays First.
If you have private health insurance, compare your benefits and coverage to what might be available from your new employer. Although group plans tend to be cheaper than individual policies, it might make sense to keep what you have rather than cancelling and reapplying at a later date. This is especially true if you have retiree health insurance from a former employer.
Pension Plans and Retirement Accounts
Returning to work will likely ease your financial situation and allow you to delay accessing your 401(k) account. But if you have a traditional pension plan or IRA, rules will vary. Check with your pension plan provider and the human resources department at your company to see if returning to work will impact your benefits. This is especially important if you’re returning to the same employer. The 401(k) rules get more restrictive for business owners with ownership interest exceeding 5 percent.
Working past age 70 1/2 doesn’t affect the required minimum distribution rules for traditional IRAs. RMDs are still required and will generally be taxed as ordinary income. There are no RMD requirements for Roth IRAs.
A CPA can help
There are many variables involved in returning to work and evaluating the short- and long-term impacts on taxes, Social Security benefits, and health care. A CPA can help you analyze your current financial situation and determine the best course of action.
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