Note: Due to the Coronavirus Aid, Relief, and Economic Security (CARES) Act, required minimum distributions (RMDs) for IRAs are waived for 2020. Learn about the RMD waiver >
After you retire, you may discover that you want to return to work for an extra stream of income or for the benefits of activity and a second career. Whatever the reason, it’s helpful to plan ahead because your Social Security benefits, health insurance and tax situation may be affected.
To help you decide whether returning to work would benefit you, here are answers to frequently asked questions we hear from clients:
Q: What financial issues should I consider if I return to work?
Work-related expenses, including transportation, food or business attire, will likely return. Your income will be subject to income and payroll taxes, and combined with your existing income, may change your tax situation. Also keep in mind that earned income may affect your Social Security benefits, as well as how much is taxed.
If you want a clear idea of how going back to work might affect your finances, crunch the numbers and do some “what-if” planning. Don’t hesitate to get help from a financial planner and tax professional with the more complex tax and retirement benefit implications.
Q: Will my Social Security benefits be reduced if I return to work?
Whether your Social Security income is reduced depends on your age. For people born in 1943 or later, the Social Security Administration (SSA) defines full retirement age (FRA) as between 66 and 67. If you haven’t yet reached your full retirement age, working could reduce your Social Security benefits. Consider the following:
If you go back to work before reaching your FRA, $1 in benefits will be deducted for every $2 you earn above the annual limit (which is $18,240 in 2020).
If you go back to work during the year you reach your full retirement age, $1 in benefits will be deducted for every $3 you earn above a higher limit ($48,600 in 2020), but only counting earnings before the month you reach your FRA.
Starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn.
Note: A reduction in benefits due to the earnings test is temporary. After you reach full retirement age, the IRS re-calculates the benefit amount and gives credit for months that you did not receive a benefit due to earnings. For more information, refer to “How we deduct earnings from benefits,” at www.ssa.gov.
Remember, as long as you’re working you will still need to pay into Social Security. Because Social Security payments are based on your highest 35 years of income, the additional earnings may boost your Social Security benefits by replacing or filling in years where you had little or no earnings.
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.”
Q: 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,” or consult with a tax advisor.
Q: 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 receive your largest monthly benefit by delaying retirement until age 70, but not beyond, so it never makes sense to wait past that age.)
The option to pay back Social Security is limited to the first 11 months’ worth of benefits, and the SSA only allows it in the first year of retirement.
For example, if you choose to receive benefits at age 62 and nine months later decide you’d like to return to work, you could stop receiving Social Security by withdrawing your application for benefits, pay back the benefits received, return to work and then defer your benefit up to age 70 to restart your benefits at a higher level. Keep in mind that you will need to repay any money that was withheld from your checks, including Medicare premiums and income tax withholding.
Q: Will Medicare eligibility affect my potential health insurance benefits from my new employer?
Eligibility for group health insurance offered by an employer 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, check with your employer’s human resources department about how their insurance coverage would work with your Medicare. You can also read “Medicare and Other Health Benefits: Your Guide to Who Pays First.”
If you have private health insurance, compare your benefits and coverage with plans offered by a new employer. Although group plans tend to be less expensive than individual policies, you could be better off keeping your individual policy rather than canceling it and hoping you can get your old coverage and rates back at a later date.
Both Medicare and Medigap have specific enrollment periods. You may be able to enroll after age 65 without penalties with employer coverage. Pay close attention to Medicare enrollment periods if you have retiree health insurance from a former employer or are under COBRA. These types of coverage do not allow you to defer enrollment past age 65 without penalties and potentially leaving gaps in your coverage.
Also note that once you are enrolled in Medicare, you’re not permitted to make contributions to a Health Savings Account (HSA). If you become enrolled in Medicare after reaching age 65, Medicare will backdate your enrollment by 6 months (but no earlier than age 65). To avoid an IRS penalty, make sure you stop contributions to the HSA in time.
Q: Will my pension be affected if I return to work?
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.
Q: Will I need to take required minimum distributions from my IRA or 401(k) if I go back to work?
Working past age 72 (70½ if turned age 70½ in 2019 or earlier) 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 72, 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 after you retire—to no later than April 1st of the year after retirement. 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.”
Q: 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 are working. If you meet relevant income limits you can also contribute to a traditional IRA or Roth IRA.
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. There are no age limits for Roth IRAs, although income restrictions apply.
Q: If I go back to work, should I change my asset allocation to account for my new income?
Generally, no. To build a retirement portfolio with a good chance of lasting your lifetime, we generally recommend that retirees who rely on their investments primarily to support retirement spending allocate at least 20% (conservative) but no more than 60% (moderate) of their portfolios to stocks.
If you’re fortunate enough that your investments aren’t earmarked solely to your retirement, how much you allocate to stocks will depend on your personal circumstances time horizon, spending relative to the size of your portfolio, and risk tolerance.
If you’re a Schwab client, review your investment portfolio and investment mix with Schwab’s Portfolio Checkup tool. You can also use the Retirement Planning Calculator for a quick estimated check on sustainable portfolio withdrawals.
The bottom line on returning to work after retirement
Returning to work is ultimately a personal decision that hinges on your financial circumstances, as well as your personal goals and lifestyle. When considering the financial implications, take into account all sources of income, compare budgets and determine the tax implications of various scenarios. As always, contact your financial advisor or other trusted financial professional for guidance.