Working in Retirement: How Does It Affect Your Savings and RMDs?

September 13, 2023 Rob Williams
Retired but thinking of going back to work? Be sure you understand how it could affect your savings plans and RMDs.

Working after retirement can raise financial questions. First, earning a salary after you've registered for government programs, such as Social Security and Medicare, can affect your taxes and maybe even lead to a temporary reduction in your benefits. And there are additional rules governing the way you use the money in your tax-advantaged retirement savings.

None of this should be taken as a reason not to work if you want to do it. But it is important that you understand how the rules could affect you if you get back on the job. Here are some key questions to ask.

Can I start contributing to my retirement accounts again?

In most cases, under current law, you should be able to contribute to your employer's qualified retirement plan regardless of your age. If you meet relevant income limits,1 you can also contribute to a traditional IRA or Roth IRA if you have earned income.

Whether the IRA contribution is tax deductible depends on your income and whether you're also an active participant in an employer-provided retirement plan.

Will I need to take required minimum distributions from my IRA or 401(k) if I go back to work?

Working in retirement doesn't affect RMDs from IRAs. If you've reached age 73, you'll have to take them from a traditional IRA. There are no RMD requirements for a Roth IRA.

The rules for qualified employer plans, such as 401(k)s, are different. If you continue to work past age 73 and do not own more than 5% of the business you work for, most plans allow you to postpone RMDs from your current—but not a prior—employer's plan until no later than April 1 of the year after you finally stop working. If you have a 401(k) from a prior employer, you may still be subject to the RMD requirement. Check with your plan administrator for both your new and prior employers.

For details, please see the IRS topic "Retirement Plan and IRA Required Minimum Distributions FAQs."

If I go back to work, should I change my asset allocation to account for my new income?

Generally, no. Having additional income from a job should work with your existing allocation, assuming it's appropriately geared toward accomplishing your goals. If your main goal is having enough to cover your spending in retirement, we generally recommend a stock allocation of at least 20% (conservative) but no more than 60% (moderate). Depending on your age, time horizon, and spending needs, such a portfolio should stand a pretty good chance of lasting for your lifetime.

How much you've already saved is another issue. If you currently have more than you need to cover your spending in retirement, you can be a little more flexible with your stock allocation. Again, this will depend on your personal circumstances, time horizon, spending relative to the size of your portfolio, and risk tolerance.

Will returning to work affect my pension?

The rules vary, depending on the plan, so check with your pension plan provider and the human resources department at your new employer to see if returning to work will affect your benefits or pension payments. This is especially important if you return to work for a former employer.

The bottom line

Working in retirement can help you earn extra money to cover your day-to-day expenses and keep you active and engaged. Just be aware that you may also need to make a few small adjustments to your retirement plans. Don't hesitate to get help from a financial planner and tax professional with the more complex tax and retirement benefit implications.

1There are no income limits for contributing to a traditional IRA. However, if you or your spouse are covered by a plan at work and you meet certain income limits, your contribution may not be tax-deductible. For a Roth IRA, you may only contribute if your income is below certain limits. For more information about the contribution rules and limits, see IRS Publication 590-A and Retirement Topics - IRA Contribution Limits.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Investing involves risk including loss of principal.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

Diversification and asset allocation strategies do not ensure a profit and cannot protect against losses in a declining market.