Sep 21, 2015 Income in Retirement – Can it affect your Social Security Benefits?
These days, returning to work after retiring is a common trend. Whether you’re looking for an additional income stream to ease your finances into full retirement, or maybe you’re wanting to purse that dream career. Whatever your reason for re-entering the workforce, your Social Security, health insurance, and tax situation may be affected. Here’s some guidance on frequently asked questions:
Will my Social Security benefits be reduced if I return to work?
It depends on your age. For benefit purposes, the Social Security Administration (SSA) defines your full retirement age (FRA) between 66 and 67 for people born in 1943 or later. If you haven’t reached this FRA milestone yet, your benefits could be reduced. Consider this example:
*If you go back to work before reaching your FRA, every $2 you earn above the annual limit (currently $15,720 in 2015) will reduce your social security benefit by $1.
EXAMPLE: You are 63 and currently receive $14,000 per year in social security benefits. You return to work and earn $30,000 in salary. Because you are $14,280 over the annual limit, your benefit will be reduced by $7,140.
*If you go back to work the year you reach your FRA, benefits will be reduced by $1 for every $3 you earn above a higher annual limit (currently $41,880 in 2015) but only counting earnings before the month you reach your FRA.
EXAMPLE: You work all year and reach FRA in June. From January to May 31st you earn $30,000. Because your earnings are under the limit, your benefits for the year are unaffected
EXAMPLE: You work all year and reach FRA in June. From January to May 31st you earn $60,000. This places you $18,120 over the limit, which will reduce your benefit by $6,040.
*Starting the month you hit FRA, your benefits will not be reduced no matter how much you earn
Can I pay back Social Security benefits I’ve already received and restart them later at a higher amount?
If you’re returning to work after a period of retirement, you may have already started receiving benefits at an early rate. The option to pay back the benefits you’ve received in order to get a higher benefit down the road is only available in the first year.
For example, if you elected to receive early benefits at age 62 and are now 63, you could stop receiving your benefits, pay back the one year’s worth of benefits you received, and then wait until you are older to restart your benefits at a higher level. There are no fees to do this and you do not have pay any interest on the benefits you already received.
Whether it makes sense to take advantage of this strategy will depend on a number of factors including your age and tax situation so you may want to enlist the help of a CPA or other professional to help you crunch the numbers.
Will I still need to take required minimum distributions from my IRA or 401(K) if I go back to work?
Returning to work does not change the rules for taking your required minimum distributions (RMDs) on Traditional IRAs starting at age 70 ½.
Rules for 401(k)s and other qualified employer plans, however, are different. If you work past age 70 ½ and do not own more than 5% of the business you work for, you may be able to postpone RMDs from your current employer’s plan until no later than April 1st of the year after you retire. You should check with your plan administrator for specifics.
Will my Social Security benefits be taxable if I return to work?
Returning to work may make your Social Security benefits taxable depending on your modified adjusted gross income (MAGI). As this amount increases, a greater percentage of your benefits become subject to income tax, up to a maximum of 85%. Currently, your benefits will begin to be taxable if your MAGI is above $32,000 for married filing jointly individuals and $25,000 for single filers.
What financial issues should I consider if I return to work?
Ultimately, returning to work is a very personal decision. Going back to work may bring more income, but it may also involve new expenses such as work attire, childcare, transportation, etc. Before you dive in, it’s wise to crunch the numbers and do some “what-if” planning. Don’t hesitate to reach out to us to help deal with any questions you may have.
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