Working in ‘Retirement’ – 4 Things to Consider
A San Antonio retirement doesn’t look the same to everyone.
More and more people are deciding to work in retirement – finding new full-time work, taking on a part-time job or opening their own business as opposed to dedicating their Golden Years to golf, grandchildren and travel.
For many people, this can be a wise and life-affirming choice. It’s a chance to continue learning, growing and, for some, building a business. However, whether you own a business and don’t plan to retire from it at the conventional retirement age or want to start a business after retiring from a “regular” job, working later in life can affect many areas in your financial life.
There are 4 important considerations to weigh before making the decision.
Your Social Security Benefits
Many people who work during retirement receive Social Security benefits at the same time. Continuing to work has many potential effects on your Social Security benefits, though, including the amount you’ll receive and your taxes.
Here’s a brief rundown:
You can work and receive Social Security retirement benefits at the same time. However, if you take these benefits early (before your full retirement age) and make too much according to the Social Security Administration (SSA), the amount you receive will be reduced. The SSA will deduct $1 from your benefit payments for every $2 you make above the 2020 limit of $18,240. In the year you reach your full retirement age, the SSA deducts $1 in benefits for every $3 you earn above the limit of $46,600. Once you reach your full retirement age, these deductions will stop.
On the flip side, the SSA bases your Social Security benefits on your 35 highest earning years. If you earn more in your “retirement” than you did before it, these years could increase your overall benefits going forward.
Don’t think that your Social Security benefits won’t be subject to taxes! It’s a common assumption, but incorrect. If your combined earnings and Social Security benefits rise above a certain level, the benefits become subject to tax. (Combined earnings include wages, pensions, investment withdrawals, interest, dividends and capital gains.)
If you are married and filing jointly, and your combined earnings fall between $32,000 and $44,000, 50 percent of your Social Security benefits may be subject to tax for 2020. If your earnings rise above $44,000, 85 percent of your Social Security benefits are subject to tax.
Your Social Security benefits can be complicated. Here are 4 other facts you may not know.
Have questions about your retirement? Contact the team at PAX Financial Group to see how we can help.
Your Healthcare Insurance Provider
If your employer is defined as having a small insurance plan (fewer than 20 people), they can legally require you to go on Medicare once you turn 65, rather than remaining in their plan.
Medicare enrollment is automatic at the age of 65 if you’re already drawing Social Security benefits. If you’re not taking benefits at the time you turn 65, you need to enroll in Medicare at least three months before you turn 65 (whether you plan to draw Social Security at that age or not).
Your Required Minimum Distributions
People are required to begin taking Required Minimum Distributions (RMDs) from their tax-advantaged retirement accounts, such as IRAs and 401(k)s, at the age of 72 or face a steep tax penalty on the funds. (The mandated age used to be 70-½, and if you turned 70-½ in 2019 or earlier, you need to be taking RMDs or face the tax penalty.)
There are only two exceptions to this rule.
- Roth IRAs and Roth 401(k)s are not subject to RMDs.
- Most companies do not require you to take RMDs from a 401(k) plan in a company you are still employed by.
Other than these two exceptions, working during retirement does not affect the RMD mandate. You will need to factor RMDs into your total income for tax purposes once you reach the required age. This extra income could put you in a higher tax bracket. Because of this, some retirees choose to donate their RMD to charity. For more on what this looks like, read our recent blog post: Seniors: Here’s a Tip to Lower Taxes while Giving to Charity.
Your Retirement Contributions
If you plan to work during retirement, you may be wondering if you can still contribute to tax-advantaged retirement plans like IRAs and 401(k)s. Many people would like to, especially as rising life expectancy means that people can live to 100 and beyond – years in which they will likely need retirement income.
The truth is you can only contribute to certain types of retirement funds.
If you’re still working at a company that offers a 401(k), you can contribute as long as you’re employed there.
There is no age limit on contributing to Roth IRAs. Your ability to contribute to a Traditional IRA, however, ends when you begin taking RMDs.
Self-employed individuals can contribute to Solo 401(k)s or Simplified Employee Pension (SEP) IRAs. However, you will also have to take RMDs from these accounts when the time comes.
The Bottom Line
Deciding how to structure your day in retirement may be exciting. But financially planning for retirement can be complex and confusing. Assumptions are dangerous. A seemingly simple decision, like getting a part-time job to help with expenses in retirement, can have a big impact – and may not be as helpful as you thought in the long-run.
Discuss your plans for retirement with a financial advisor and make sure you understand your options. Business owners have additional concerns. A simple conversation can go a long way.
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