Rosalind Evans
Returning to work after retirement is becoming more common due to the current state of the economy. High inflation and rising interest rates have led many retirees to withdraw more from their retirement accounts, making it challenging to meet their financial needs. While unretiring can help restore financial stability, there are important considerations to keep in mind.
Social Security
The decision to return to work is influenced by whether you have reached your full retirement age and if you have been receiving Social Security benefits during your retirement.
If you are receiving Social Security benefits but haven’t reached age 67, you can earn up to $21,240 in 2023 before your benefits start to be reduced. Earning more than this amount will result in a decrease of $1 for every $2 earned.
Once you reach full retirement age, there are no income limits or penalties. If your Social Security benefits were withheld earlier due to high earnings, those withheld benefits will be credited to you after reaching full retirement age.
Medicare
Retirees who decide to return to work need to be cautious about their Medicare coverage. Medicare Part B and Part D premiums are based on income, so an increase in earnings can lead to higher premium costs.
If your employer offers a health care plan that is acceptable as primary coverage, you can drop Medicare Part B and re-enroll later without penalties. However, if you choose to drop Medicare, you have an eight-month window to re-enroll once you finish working, or you may face a late enrollment penalty.
It is also possible to have both Medicare and private health insurance through your employer, with one considered primary coverage and the other secondary. It’s important to note that having both will prevent you from contributing to a health savings account (HSA) through your employer without incurring a tax penalty.
The allocation of medical cost coverage is contingent upon the size of your company. In the case of employers with over 20 employees, their coverage takes precedence. Conversely, if the number of employees is fewer than 20, Medicare assumes responsibility for covering the costs.
Tax Bracket Changes
Returning to the workforce after retirement can complicate your tax situation, especially if the additional income pushes you into a higher tax bracket. This is particularly relevant for individuals receiving additional income from retirement accounts, pensions, or Social Security.
Consider converting some of your tax-deferred retirement accounts to Roth versions, where you pay taxes upfront. This strategy offers several advantages. You won’t have to pay income tax when withdrawing funds from these accounts since you already paid taxes when contributing to them. Additionally, you won’t be required to take minimum distributions, preventing unnecessary income that might push you into a higher tax bracket. Consulting a financial adviser can provide valuable guidance to lower your tax burden if you choose to unretire.
Returning to the workforce after retirement may feel like cutting a well-planned vacation short, which is not an appealing prospect for many. Avoiding unretirement and saving adequately to enjoy your golden years is an achievable goal, but it requires a personalized financial plan tailored to your needs.
