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going back to work

Retired but Thinking of Going Back to Work?

Key Points
  • You may want to return to work to pursue an encore career or maintain your desired lifestyle after retirement.

  • Working after retirement can impact your Social Security benefits, health insurance and taxes.

  • You can contribute to certain retirement accounts if you begin working again.

After you retire, you may discover that you want an additional stream of income for peace of mind in your golden years. Or maybe you want to pursue a second career. Whatever the reason for returning to work, your Social Security benefits, health insurance, and tax situation may be affected. To help you decide whether returning to work will benefit you, here are our answers to some frequently asked questions:

What financial issues should I consider if I return to work?

Going back to work may bring you more income, but it also involves new expenses such as transportation, food, work attire, and childcare if you have dependents. Your new income will be subject to income and payroll taxes, and combined with your existing income, may alter your tax situation. In addition, your new income may also affect your Social Security benefits.

You won’t know for sure how going back to work might affect your finances until you crunch the numbers and  do some "what-if" planning. Lastly, don’t hesitate to get help from your tax or financial professional to deal with the more complex tax and retirement benefit implications.

Will my Social Security benefits be reduced if I return to work?

Whether your Social Security income is reduced depends on your age. For benefit purposes, the Social Security Administration (SSA) defines the full or normal retirement age (NRA) as between 66 and 67 for people born in 1943 or later. If you haven’t yet reached your NRA, working could reduce your Social Security benefits. Consider the following:

  • If you go back to work before reaching your NRA, $1 in benefits will be deducted for every $2 you earn above the annual limit (which is $15,720 in 2015).
    • EXAMPLE: You retire early and go back to work before you reach your full retirement age. In that time you earn $30,000 in salary. Because you are  $14,280 over the annual limit, your Social Security benefits are reduced by $7,140.
  • If you go back to work the year you reach your NRA, $1 in benefits will be deducted for every $3 you earn above a higher limit ($41,880 in 2015), but only counting earnings before the month you reach your NRA.
    • EXAMPLE: You work all year and reach your full retirement age in June. From January 1-May 31 you earned $15,000. Because your earnings are under the limit, your Social Security benefits for the year are unaffected.
    • EXAMPLE: You work all year and reach your full retirement age in June. From January 1-May 31 you earn $50,000. At this point you have earned $8,120 over the annual limit, which reduces your Social Security benefits for the year by $2,707.
  • Starting the month you hit your NRA, your benefits are no longer reduced no matter how much you earn.

Note: Any reduction in benefits due to the earnings test is only temporary, analogous to "withholding." You will get the money back in the form of a higher benefit at full retirement age, so we don't believe most people should be concerned about earning too much.

You can estimate how much your annual benefits will be reduced by using the SSA's Retirement Earnings Test Calculator. For more information, see the SSA publication How Work Affects Your Benefits.

Will my Social Security benefits be taxable if I return to work?

Your Social Security benefits may be taxable, depending on your modified adjusted gross income (MAGI). As your MAGI increases above a certain threshold (from earning a paycheck, for instance), a greater percentage of your benefits is subject to income tax, to a maximum of 85%. For details, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Can I pay back Social Security benefits I've already received and then restart them later at a higher amount?

If you've taken Social Security benefits early at a reduced rate, you have the option of paying back to the government what you’ve already received and restarting benefits at a later date with a higher payout. (You will receive your largest benefit by delaying retirement until age 70, so it never makes sense to wait past that age.) The option to pay back Social Security is limited to one year’s worth of benefits and is only possible in your first year of retirement.

For example, let’s say you elected to receive early benefits at age 62 and are now 63 and thinking of going back to work. You could stop receiving Social Security, pay back the year's worth of benefits you received, return to work, and then wait until age 70 to restart your benefits at a higher level. You don’t have to pay any interest on the benefits you’ve already received and there are no fees.

Whether it makes sense to take advantage of this option depends on your tax situation, your age, your life expectancy, and whether or not you're able to repay the benefit amount. You might want to enlist the help of a CPA or other professional to help you crunch the numbers. For important details about repaying benefits please read the SSA publication, If You Change Your Mind.

Will Medicare eligibility affect my potential health insurance benefits from my new employer?

Eligibility for group health insurance is one of the primary reasons many people under age 65 stay in (or return) to the work force. If you’re 65 or older and already covered by Medicare, be sure to check with your employer’s human resources department about how their insurance coverage would work with your Medicare. You can also check out Medicare and Other Health Benefits: Your Guide to Who Pays First.

If you have private health insurance, carefully compare your benefits and coverage to what might be available at your new employer. Although group plans tend to be cheaper than individual policies, you might be better off keeping your individual policy rather than cancelling, switching to group coverage, and then hoping you can get your old coverage and rates at a later date. This is especially true if you have retiree health insurance from a former employer.

Will my pension be affected if I return to work?

The rules vary from plan to plan, so be sure to check with your pension plan provider and your new human resources department to see if returning to work will have any impact on your benefits. This is especially important if you plan to return to your former employer.

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

Working past age 70½ does not affect the required minimum distribution (RMD) rules for traditional IRAs—RMDs are still required. However, there are no RMD requirements for Roth IRAs.

The rules for qualified employer plans, such as 401(k)s, are different. If you continue to work past age 70½, and do not own more than 5% of the business you work for, you should be able to postpone RMDs from your current employer’s plan until after you retire—to no later than April 1st of the year after retirement. Check with your plan administrator.

For important details about RMDs please see the IRS topic Retirement Plans FAQs Regarding Required Minimum Distributions.

Can I start contributing to my retirement accounts again?

In most cases, you should be able to contribute to your employer’s qualified retirement plan regardless of your age as long as you’re working.  And if you're under age 70½ you can also contribute to a traditional IRA. Whether the IRA contribution is tax deductible depends on your income if you’re also an active participant in an employer-provided retirement plan. There are no age restrictions for Roth IRAs, although income restrictions do apply.

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

To build a retirement portfolio that has the best chance of lasting a lifetime, we recommend that retirees who rely on their investments for a significant portion of spendable income allocate at least 20% (conservative), but no more than 60% (moderate) of their portfolios to stocks.

Regardless of whether the stock market rises or declines over time, our guidance remains unchanged: How much you continue to allocate toward stocks depends on your personal circumstances and on how much risk you're willing to take.

If you're a Schwab client, you can get started by reviewing your investment portfolio with Schwab’s Portfolio Checkup tool. You can also use the Retirement Planning Calculator for a reality check on sustainable portfolio withdrawals.

The bottom line on returning to work after retirement

Returning to work is ultimately a personal decision that depends on your financial circumstance and your preferences. Take into account all sources of income, compare budgets and determine the tax implications of various scenarios as you seek to write your own retirement check. As always, contact your CPA or other trusted financial professional for further guidance.

Talk to Us

  • Call Schwab anytime at 877-338-0192.
  • Talk to a Schwab Financial Consultant at your local branch.
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