It's becoming increasingly common for older adults to work past retirement age or come out of retirement to pick up a part-time job. This can provide a welcome source of additional income and opportunities to socialize with others, but it can also hurt you if you don't understand how the extra money will impact your taxes, retirement accounts, and Social Security benefits. Here are some of the most important things you need to know before taking a job in your 60s or 70s.
1. You could end up in a higher tax bracket if you earn enough
When calculating how much money needed for retirement, most people plan on being in the 12% tax bracket. This covers individuals who make between $9,526 and $38,700 per year and married couples filing jointly who make between $19,051 and $77,400 per year.
But if you're already drawing from your 401(k) or IRA and then add income from a full- or part-time job, it could push you into the next tax bracket -- 22% -- and you may end up owing more than you expect. Keep an eye on your income and check the new tax brackets each year so you know how much you can earn without paying a larger percentage in taxes. If you're close to the limit, you may want to consider delaying your retirement distributions until you need them later.
2. You may not get your whole Social Security benefit if you're under the full retirement age
Full retirement age ranges from 65 to 67, depending on the year you were born. You can begin drawing on your Social Security benefit starting at age 62, though this will reduce the amount that you receive per month.
If you're collecting Social Security before your full retirement age and your income is above a certain amount, some of your Social Security benefit will also be withheld. The limit changes every year. For 2018, it is $17,040. For every $2 you earn over this amount, $1 will be withheld from your Social Security benefit.
If you are going to reach full retirement age in 2018 (66 and four months), you may earn up to $45,360 without incurring a penalty, and only $1 out of every $3 you earn beyond this limit will be withheld. Once you reach full retirement age, you will begin receiving your full Social Security benefit with no penalties based on your income. Your benefit amount will be recalculated at this time, and any amount that was withheld previously will be added into your new monthly payment.
3. Working could boost your Social Security payment
Your Social Security payment is calculated based on your average monthly earnings during the 35 most profitable years of your life. If the job you're working at now pays you better than some of the jobs you've had earlier in your life, continuing it could help to boost the amount of Social Security that you get when you finally begin taking distributions.
If you haven't worked for 35 years, you'll have several zero-income years on your record that can reduce your benefit significantly. In that case, you're better off continuing to work even if you're not making a lot of money because it will help to raise your average monthly earnings. This could result in hundreds of dollars more per year when you do begin to collect Social Security.
4. You can save for the future by delaying your Social Security benefits until age 70
Though you can start drawing on your Social Security benefits at 62, you will get more per payment if you delay that, especially beyond full retirement age. This increase maxes out at 132% of your calculated benefit amount when you reach age 70. If you're comfortable working up until then, your Social Security will go much further in your retirement years.
To put this in perspective, the average monthly Social Security benefit in 2018 is $1,404. Retirees who begin taking their benefits at the current retirement age (66 for those born between 1943 and 1954) will receive 100% of that amount. But if those same individuals were to delay taking Social Security benefits until they reached age 70, they would receive $1,853.28 per month.
5. If you continue working past 70 1/2, you may be able to delay your 401(k) distributions
In most cases, you're required to start taking distributions from your 401(k) at age 70 1/2. But there's an exception to this if you continue to work and you don't own more than 5 percent of the company you work for. By leaving money in your 401(k) for longer, you're allowing it to accrue more interest so you'll have more money when you do withdraw it, and it won't need to last you as long.
Not all 401(k) plans enable you to do this, however, so check with your employer to see if you are eligible to delay your required minimum distributions. If you are able to delay them while you are working, you must begin taking distributions by April 1 after you retire.
6. Workers over 50 can put a larger percentage of their income toward retirement
If you weren't able to save as much as you would have liked when you were younger, you can make up for that by contributing more to your 401(k) and IRA after age 50. You can add up to $6,500 each year to your traditional or Roth IRA, compared to a maximum of $5,500 for individuals under 50. You can also contribute up to $24,500 to your 401(k) -- a $6,000 increase over the under-50 limit. Contributing more will also help lower your taxable income.
You won't have as much time for that money to accrue interest, but it can still add up. For example, say you put in $6,500 when you were 50. By the time you're ready to retire at 67 (for individuals born in 1960 or later), that money will have grown into $13,079.28, assuming a 6% interest rate.
7. You can no longer contribute to a traditional IRA once you're over 70 1/2
You must begin taking distributions from your traditional IRA by April 1 of the year that you will turn 70 1/2, and you cannot make any further deposits to this account. This is because contributions are only taxed when you make a withdrawal, and the government wants to make sure it gets its share of your earnings.
Roth IRAs are different because you're already taxed on this money when you earn it. You aren't required to take any minimum distributions, and you can keep contributing to a Roth IRA as long as you are working. You can also continue stashing money in a 401(k), if your employer offers one of these.
8. You may have to pay taxes on your Social Security benefits
Social Security benefits used to be tax-free, but now it's possible that you could end up giving some of it back to Uncle Sam if you make enough money.
If you're filing your taxes as an individual and you make more than $25,000 in a year, you will have to pay taxes on up to 50% of your Social Security benefits. The same goes for married couples filing jointly who have a combined income of more than $32,000. Individuals making more than $34,000 and couples making more than $44,000 can be taxed on up to 85% of their Social Security benefit. Your income is calculated by looking at your adjusted gross income, tax-exempt interest income, and half of the Social Security benefits you're receiving.
The most important thing you can do if you plan on working into your 60s or 70s is to educate yourself on how that income will impact the rest of your finances. Rules change every year, and staying abreast of them is important if you don't want to run into any unexpected surprises.
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