An increasing number of Americans are working past the traditional retirement age, either because they love what they do or because they can't afford to retire sooner. Continuing to work into your 70s or beyond can provide socialization and a much-needed source of income. It can also affect your taxes, retirement savings, and Social Security benefits in ways you hadn't anticipated. Here are three key things you should know if you plan to work past 70.
1. You might not have to take required minimum distributions (RMDs)
Required minimum distributions (RMDs) are government-mandated withdrawals from each of your retirement accounts, except Roth IRAs. Retirees must begin taking RMDs at 70 1/2, but you can delay RMDs from defined contribution plans, like 401(k)s, if you are still working and own no more than 5% of the company you work for. In that case, you must begin these RMDs in the year you retire. You can calculate yours by dividing your retirement account balance by the distribution period next to your age in this table.
Delaying RMDs can help you out if you don't have as much saved for retirement as you would like, because it enables you to keep your existing savings in your retirement account where they can grow for longer. You can withdraw only as much as you need rather than the government-mandated amount, which might be more than you want to remove. But then, when you finally retire, your RMDs will be larger due to your higher account balance.
Don't forget about your RMDs once you are required to start taking them. Failing to withdraw as much as you should results in a 50% penalty on the extra you should have withdrawn. Better to take the money out and pay the taxes on it than give the government half of it for no reason.
2. You should start taking Social Security if you haven't already
Every month you delay Social Security benefits increases the size of your checks. But this stops at 70. At that point, you're eligible for the maximum amount of 124% of your scheduled benefit per check if your full retirement age (FRA) is 67, or 132% if your FRA is 66. Delaying benefits beyond 70 is just costing you money.
You can apply for Social Security online, over the phone, or by visiting your local Social Security office. You may begin Social Security even if you're still working. Make sure you know your Social Security number and have a copy of your W-2 from the previous year. You'll also need your birth certificate and proof of citizenship if you weren't born in the United States.
3. You could be in a higher tax bracket than you anticipated
Most people expect that they will spend less money as they age, and they may even plan on being in a lower tax bracket. But this might not be true if you're working and drawing upon your retirement savings or Social Security benefits at the same time.
You'll owe taxes on your employment income and any money you withdraw from tax-deferred retirement accounts. You could also owe taxes on up to 85% of your Social Security benefits if your income exceeds $25,000 for a single individual or $32,000 for a married couple. This could result in a tax bill that's higher than expected.
If you don't touch your retirement savings until you actually leave the workforce, you'll have larger RMDs when you do retire. These could force you to withdraw more money than you want from your retirement accounts each year, also raising your taxes.
While this is something to be aware of, you'll probably still come out ahead by continuing to work, especially if you got a late start on your retirement savings and are worried about running out of money before your life is over. The tax brackets will change over time, too, so you'll be able to spend more money each year without raising your tax bracket.
Working over 70 can have several benefits, but there are also potential tax drawbacks. You also need to understand how your age affects your Social Security benefits so you don't miss out on a valuable supplementary source of income that could help you cover your expenses.