Co-authored by Angie Whiteside, CPA, Senior Manager at Wipfli LLP.
The following article was prepared in collaboration with our affiliate, Wipfli LLP. With more than 2,400 associates across the United States and in India, Wipfli ranks among the top accounting and business consulting firms in the nation.
More than one-third of retirees today are choosing to reverse their retirement and go back to work.
There are many reasons why people decide to go back to work after retirement. Some are seeking extra income to cover for lack of financial planning in the past or increased living and healthcare costs. For others, it isn’t about the money. They are seeking more social interaction or a second, less stressful, career.
Working post-retirement may not always be good for your benefits.
Here are five things to consider before you decide to retire from retirement:
1. Your social security benefit
If your additional income puts you above the annual earnings limit, you could temporarily lose some or all of your social security benefit before you reach your full retirement age (FRA). In 2019, your benefit is reduced $1 for every $2 you earn above $17,640. (If you’re unsure what your full retirement age is, find out here.)
In the year you reach full retirement age, the limit to what you can earn increases to $46,920 (in 2019). Then, your benefit is reduced by $1 for every $3 of income you earn above the $46,920 limit.
Your earnings will only be counted until the month before you reach your FRA.
Once you reach full retirement age, you can work has much as you want without impacting your social security benefit.
If you’re not already receiving social security, going back to work is a great opportunity to continue to delay your benefit.
If you wait to file until you reach your FRA, you will have earned your full benefit amount. To increase your benefit even more, once you’ve reached your FRA (and haven’t filed yet), your benefit will permanently increase each year until you turn age 70.
2. Take advantage of qualified plans
Going back to work after retirement allows you to continue building up your nest egg.
Consider finding a position that offers a tax-deferred savings plan and contribute up to your employer’s match once you’re eligible. If cash flow allows, try to contribute up to the annual limit and take advantage of catch up contributions. This will help you set aside larger amount of money for retirement.
If you return to work part-time but still need to supplement your cash flow, some plans allow you to take in service distributions. This allows you to take some type of monthly payout from the plan while you’re still employed. Be sure to ask if your plan allows this option as it can vary from plan to plan. Otherwise, if you’re over the age of 59.5 you can also supplement your income from an outside IRA account or 401(k) plan.
3. Required minimum distributions (RMDs)
If you return to work and are over the age of 70.5, you will be required to start taking distributions from your 401(k) and any pre-tax IRAs. However, keep in mind there are no RMD requirements for Roth IRAs.
If you’re over 70.5 and are deferring funds into your employer’s 401(k) plan, most plans allow you to postpone your RMD, as long as you are not a 5% or more owner of the business. This option is only available for your current plan and not any outside 401(k) accounts, but there is a strategy to get around this.
To continue to defer your retirement dollars into the future, consider rolling over your outside IRA’s and old 401(k) plans into your employer’s new plan. Be sure to check with your employer first to see if the plan accepts rollovers.
4. Health insurance and associated costs
Access to employer offered group health insurance is one of the main reasons people go back to work after retirement.
If you’re already covered by Medicare, contact your new employer’s HR department to see how their insurance coverage would work with your current coverage. Also keep in mind that if your income exceeds $85,000 as a single filer or $170,000 for married filers, your Medicare Part B premiums will increase over the standard amount of $135.50 per month.
If you have private insurance, compare your benefits with the coverage offered by your new employer. While group coverage is usually cheaper, it may be beneficial to keep your private insurance policy instead of cancelling since you might not be able to get your old coverage and rates back in the future.
To help cover health costs, consider taking advantage of a health savings account (HSA).
You can open and contribute to an HSA at age 65 or later as long as you meet HSA eligibility requirements and you have not yet enrolled in Medicare part A, B, or D. Once you enroll in Medicare you can no longer contribute to an HSA, but you can use the account to pay Medicare premiums, which is still an added benefit.
5. Income taxes
The additional income generated by going back to work means more to pay in taxes.
To avoid being bumped into a higher tax bracket, consider deferring funds into tax advantaged plans to help lower your taxable income.
If you’re already claiming social security, be aware of how your new income could impact how much of your benefit is taxable. Eighty-five percent of Social Security benefits are taxable for joint filers with a combined income of over $44,000 or single filers with an income over $34,000. Up to fifty percent of benefits may be taxable for incomes below those figures. However, be sure to consult with a tax professional to ensure you’re aware of any complex tax or benefit implications.
Going back to work after retirement is a personal decision and is dependent on your individual circumstances. It’s important to review your financial plan to ensure you are still set up to meet your goals and that your retirement nest egg is set up to last for your lifetime.
Consider meeting with a financial advisor to explore your options. Wipfli Financial can help you put together the options that are right for you.