Retirement is a major life change. After years of working, you finally get to take a break and enjoy your later years doing the things you love. But sometimes retirement doesn’t work out as planned. You may find you don’t have enough money to maintain your lifestyle or you get bored without the daily purpose that work provides. If this happens, going back to work after retirement may be an option.
Can you collect Social Security benefits and work at the same time?
Yes, you can work and collect Social Security retirement benefits at the same time. However, your benefits could be temporarily reduced depending on how much you earn. Here’s how it works:
- If you are under full retirement age (currently age 66), $1 in benefits will be deducted for each $2 you earn above the annual limit. For 2023, this limit is $21,240.
- In the year you reach full retirement age, your benefits will be reduced by $1 for every $3 you earn above a higher annual limit. For 2023, this limit is $56,520.
- Starting the month you reach full retirement age, your benefits will no longer be reduced, no matter how much you earn.
The Social Security Administration (SSA) will review your reported earnings on your tax return every year to see if they need to adjust your benefits. One advantage of working after taking Social Security is that your earnings could increase your future Social Security benefit if you qualify.
How will working affect your Social Security taxes?
If you have a job after retirement, you’ll continue paying into Social Security with payroll taxes. The tax rate is 6.2% on your income up to the annual maximum ($160,200 in 2023). Your employer also contributes 6.2%. If you’re self-employed, you pay the full 12.4% yourself.
Paying Social Security taxes on your earnings after retirement will slightly increase your future Social Security benefits. Each additional year of work replaces one of the zero or lower earning years used to calculate your benefit. This can provide a bump in your payment down the road.
Will working impact your health insurance coverage?
If you’re covered by employer health insurance, be aware your coverage will end if you leave the job. You can keep your employer coverage through COBRA, but you’ll have to pay the full premium cost. Here are some other health insurance considerations for working after retirement:
- You may qualify for job-based coverage from your new employer if they offer health insurance.
- If you have Medicare already, it will remain your primary coverage if you have other health insurance from an employer.
- If your employer has fewer than 20 workers, Medicare will remain your primary coverage.
- If your new job has 20+ employees, their group health plan will be your primary coverage.
Make sure to check how your new job’s health insurance coordinates with Medicare to avoid gaps in coverage.
How will my retirement accounts be affected if I return to work?
Going back to work part-time or full-time after retirement will impact your retirement savings accounts:
- 401(k) plans: You can continue contributing to your 401(k) at your new job. This allows you to keep building your retirement savings. Required minimum distributions must continue once you reach age 72.
- IRAs: You can still contribute to a traditional IRA past age 70 1/2 as long as you have earned income. Roth IRA contributions can be made at any age if you meet the income limits.
- Pensions: Your former employer’s pension may be reduced if you work for a competitor or in the same industry. Check with your pension plan.
Retirement accounts from past employers can continue growing tax-deferred. Withdrawals you take will be taxed as ordinary income. Consider your income tax rate when taking withdrawals.
How will working affect my Social Security taxes if I’m collecting benefits?
Here is a summary of how working will impact your Social Security taxes if you are collecting retirement benefits:
| Your Age | Effect on Benefits | Social Security Tax |
|---|---|---|
| Under full retirement age | $1 deducted for every $2 earned above $21,240 (2023) | You pay 6.2% on income up to $160,200 (2023) |
| Year reach full retirement age | $1 deducted for every $3 earned above $56,520 (2023) | You pay 6.2% on income up to $160,200 (2023) |
| After full retirement age | No benefit reduction, no matter how much you earn | You pay 6.2% on income up to $160,200 (2023) |
As you can see, working substantial earnings before your full retirement age will temporarily reduce your Social Security benefits. But once you reach full retirement age, you can earn as much as you want without any impact on your monthly payment.
Should I withdraw retirement account funds to supplement income?
If going back to work doesn’t provide enough income, you may consider taking withdrawals from retirement accounts like IRAs or 401(k)s. This can help bridge the gap until Social Security payments start. However, carefully weigh the pros and cons of this strategy.
Potential advantages:
- Allows you to maintain your lifestyle
- Income is available when you need it
- Can supplement earnings from work
- Taxable withdrawals let you control your tax bracket
Potential disadvantages:
- Withdrawals deplete retirement savings faster
- Paying income tax reduces account balance further
- Could push you into a higher tax bracket
- May increase future RMD amounts
- Less savings remaining for later in retirement
Only withdraw money from retirement accounts when absolutely needed. Try to minimize withdrawals to preserve your nest egg.
How can I reduce taxes on my Social Security benefits?
Unfortunately, Social Security benefits are taxable income. But there are a few potential strategies to reduce the taxes you owe:
- Keep income low to stay in the 0% tax bracket for Social Security
- Withdraw more income from Roth accounts since those distributions are tax-free
- Harvest tax losses to offset capital gains
- Use pre-tax deductions such as charitable contributions to lower your AGI
- Contribute to a Health Savings Account (HSA) if eligible
Work with a tax professional to determine the best moves to minimize your overall income tax liability in retirement, including taxes owed on your Social Security benefits.
How can I avoid penalties on early retirement plan withdrawals?
Withdrawing money from IRAs or 401(k)s before age 59 1/2 results in a 10% early withdrawal penalty. But there are exceptions that allow you to access retirement funds penalty-free if you need income after returning to work:
- Rule of 55: No 10% penalty on 401(k) withdrawals if separated from service in the year you turn 55 or later.
- Substantially equal periodic payments: Annuitized payments based on life expectancy avoid penalties.
- IRS levy: No penalty if paying IRS or state/local tax levy.
- Disability: Waived if you’re disabled according to the IRS definition.
If you want to tap your retirement savings early, use one of these exceptions to avoid getting hit with extra taxes and penalties.
Should I withdraw retirement money to pay off debt?
It can be tempting to use retirement funds to eliminate debt during early retirement:
| Potential Benefits | Potential Drawbacks |
|---|---|
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Generally, avoiding tapping retirement accounts to pay off debt is wise. Work on paying down debt aggressively using your income instead. This preserves your retirement savings for later.
What happens if I retire, claim Social Security, and then go back to work?
Here is a summary of what will happen if you retire, claim Social Security benefits, and then return to work:
- Your Social Security benefits may be temporarily reduced if you earn above the annual limits before reaching full retirement age.
- You will continue paying 6.2% Social Security payroll taxes on your earnings.
- Your new job may provide health insurance coverage to replace COBRA or Medicare.
- You can contribute to tax-advantaged retirement accounts again through your new employer.
- Withdrawals from IRAs or 401(k)s you had from before returning to work will be taxable income.
- Social Security benefits will still be taxable income based on your provisional income.
The main impact is potential temporary benefit reductions and paying Social Security taxes again. But returning to work can be a great way to stay active and enhance your finances in retirement if needed.
Conclusion
Deciding to re-enter the workforce after retirement is a major choice. While it can help improve your financial situation, it also reduces free time and flexibility. Before returning to work, carefully consider your full financial picture.
Ideally, you should not need to go back to work after retirement. Proper planning can help ensure you have enough savings and income for your needs. But if circumstances require, returning to work part-time may offer the best option to supplement your retirement income.
The key is understanding how employment will impact your Social Security benefits, taxes, healthcare, and retirement accounts. Coordinating all these factors will allow you to maximize the benefits of going back to work while minimizing the drawbacks. With the right strategy, working after retirement can provide a helpful income and activity boost during your later years.