How does returning to work impact Social Security Benefits?

If you have started taking Social Security benefit payments, they may be reduced if you start making income again. The key to figuring out how and if your Social Security payments will be impacted is dependent on whether you have reached Full Retirement Age (FRA).

See the chart (right) to determine your FRA based on the year you were born. If you have not reached FRA but have started receiving benefits, you may be subject to deductions from your benefits.

• Before you reach FRA, $1 of Social Security benefits will be deducted for every $2 you earn in income above the annual limit of $22,320 in 2024.

• In the year you reach FRA, $1 in Social Security benefits will be deducted for every $3 you earn in income above a higher annual limit of $59,520 in 2024.

• The month you reach your FRA your benefits are no longer deducted, no matter how much income you earn.

If you have already started drawing Social Security benefits and have not reached FRA, this is an important thing to consider when thinking about going back to work, as you may have less total income than you anticipated if your Social Security benefits are reduced.

How does your tax situation change?

There are a couple of different ways your tax situation could be changed due to returning to work in your golden years. First, earning additional income may impact your overall tax situation just as it did before retirement, as your income will be subject to income and payroll taxes. Your new paycheck could push you into a higher tax bracket and impact eligibility for certain tax credits and deductions.

Second, if you have started to take Social Security benefits, they may be taxable with increased income. Depending on your combined income (adjusted gross income + non-taxable interest + half your social security benefit) and filing status,s you may have to pay taxes on up to 85% of Social Security benefits. You will, however, never pay income tax on more than 85% of your social security benefit.  This applies to federal taxes only. State taxes are another set of rules that vary from state to state, so it is best to consult a tax professional for particular circumstances.

What is the impact on my Retirement Savings (IRS, Roth, 401K, Pension)?

If you receive a pension, it may be affected by returning to work. Plans vary, so it is best to check with your plan provider to get the best answer. This can be even more important if you are returning to work for the same employer providing your pension.

For traditional IRAs, working beyond the age you must begin taking required minimum distributions (RMDs) does not have an impact on RMDs. This is between age 70.5-75, depending on when you were born. You must take your annual RMD and the amount will be unchanged if you are still working.

Your 401(k) is a little bit different. Most plans that are offered through your current employer will allow you to postpone your RMD if you are still working past your required beginning date. If you are working for a different company than the one your 401(k) is through, you may still have to take your RMD once you reach your required beginning date.  There are steep penalties if you fail to take your required minimum distribution. Every plan is a little different, so verify with your plan provider.

An advantage to continuing to work later in life is that you can continue to contribute to your employer’s qualified retirement plan as long as you are working. You can also contribute to a traditional IRA if you participate in your employer’s retirement plan and meet the income requirements. There are no income requirements for Traditional IRAs if you are not participating in an employer-sponsored retirement plan. A Roth IRA has no age restrictions for contribution, but there are income limitations.

Should you return to work?

The answer can be complex, and it is a personal decision that might not be based solely on finances. We recommend speaking with a financial planner to make sure you understand the impact on your social security benefits, taxes, and retirement accounts before you collect that first paycheck. Even with changes to your taxes or social security, going back to work might be the right decision for your overall well-being, and if that is the case, it can still be the right choice. The key is understanding the impact going back to work can have and making an informed decision that is best for you.