The current economy is forcing many people who are in their golden years to cut short their retirement and go back to punching the clock. If you’re one of them, and you’re fortunate enough to find a job, there’s no doubt that the increased income will be a welcome relief.
However, if you’ve been receiving Social Security benefits, pension payments, or distributions from retirement accounts, a return to the workforce could cause a complicated tax situation. To prevent any unwelcome surprises, ask yourself these questions before accepting a new job:
How much more will I pay in taxes?
“One of the biggest issues retirees have when they return to work is an unexpected increase in taxes. Sometimes the additional income pushes them into a higher tax bracket, and they weren’t anticipating it,†says Steven Sanders, chairman and CEO of First Genesis Financial Group, a financial advisory firm in Newtown Square, Pennsylvania.
How will a new job affect my Social Security benefits?
It’s fine to have a job while you’re receiving retirement or survivor benefits. The extra income would be averaged into your total earnings history, so you could actually receive a higher Social Security benefit in the future.
At the same time, if you’re receiving payments, but you’re not at full retirement age, some of your benefit amount could be reduced based on your income. To find out more information, visit the Social Security Administration’s Websiteforwp-incontent-custom-banner ampforwp-incontent-ad2">
How is my IRA affected?
You can receive distributions from your Roth IRA or Traditional IRA if you meet the conditions (see IRS.gov for details). However, you might choose to wait before receiving all of your allowed payouts. “Many clients are taking only the minimum required distribution from their IRAs so they can let the money in their IRAs last longer,†Sanders says.
While this may be a prudent choice, keep in mind that individuals will have to start taking mandatory distributions from traditional IRAs at age 70 ½. The withdrawals, which can be significant if there haven’t been any distributions up to that point, are taxed as ordinary income. “Those mandatory distributions could put an individual at the highest tax bracket for the rest of their lives,†says Gary Oliver, a partner with Fortius Financial Advisors in Salt Lake City, Utah. He suggests focusing on retirement planning in advance to try to reduce that tax burden.
Are there any waiting periods for health insurance?
One major reason retirees return to work is to access health insurance. Ask your potential employer if there’s a waiting period before you can receive this valuable benefit. “Many people want to go back to work to increase their cash flow, but that cash flow could be automatically improved if they didn’t have to wait to pay for (individual) health insurance,†Sanders says.
When can I retire again?
You may choose to continue working because you enjoy
it, but you should still save for retirement. “You don’t want to be forced to keep working and never retire,†Oliver says. Don’t let a job be your only retirement strategy!What else should I know?
Everyone’s individual situation is different, so contact an experienced financial advisor to answer your specific money, tax, and retirement questions.
Once you’ve done your planning, you can head back to work with confidence. “When a retiree re-enters the workforce, employers benefit by having the wisdom and experience those seasoned citizens have, and the employee has a place where they can receive additional cash flow and maybe enjoy reduced health care insurance costs,†says Sanders. It’s a true win-win for everyone.