Returning to Work After Retirement

After being retired for a bit you realize that you may not want to play golf 5 days a week, you miss your co-workers and you are not traveling as much as you thought you would. This is common – more and more people these days are deciding to return to work or start new careers after retirement. Whether you plan to go back to work full time, part time, start your own business or work for someone else there are a few factors to consider before you step back into the workforce.

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 if 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 ($17,040).
  • In the year you reach FRA, a $1 in Social Security benefits will be deducted for every $3 you earn in income above a higher annual limit ($45,360).
  • The month you reach your FRA you 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.

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How does your tax situation change?

There 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 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 state to state, so it is best to consult a tax professional for particular circumstances.

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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 age 70 ½ does not have an impact on your required minimum distribution (RMD).  You must take your annual RMD and the amount will be unchanged if you are still working. (Roth IRAs do not have RMDs.)

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 age 70 ½. If you are working for a different company than the one who your 401(k) is through you may still have to take your RMD once you reach age 70 ½.  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 are under age 70 ½, participating in your employers retirement plan and meet the income requirements ($101,000-121,000 phase out for married filing jointly and $64,000-74,000 for single filers in 2019). 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 ($193,000-203,000 phase out for married filing jointly and $122,000-137,000 phase out for single filers in 2019).

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 “what-if” planning with a CERTIFIFED FINANCIAL PLANNER ™ to make sure you understand the impact to your social security benefits, taxes and retirement accounts before you collect that first pay check. 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 to understand the impact going back to work can have and making an informed decision that is best for you.