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Making Your Money Last

Impact of a Paycheck on Retiree Benefits

Returning to work could affect your Social Security, pension and Medicare coverage.

EDITOR'S NOTE: This article was originally published in the April 2009 issue of Kiplinger's Retirement Report. To subscribe, click here.

With the abysmal stock market and slashed savings, you may be thinking of giving up retired life to head back to the workforce. But returning to work can have an impact on your retirement benefits. Here's what you need to know before you pack up your briefcase and head out the door.

Social Security. If you've hit your full retirement age, your Social Security benefits will not be reduced no matter how much you earn. Full retirement age is 66 for people born between 1943 and 1955.

But those who started collecting benefits before reaching full retirement age will be subject to an "earnings test." If you won't hit your full retirement age in 2009, you'll lose $1 in benefits for every $2 in earnings above $14,160.

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That means in some cases the extra income may not go very far. For example, if your Social Security payout is $9,000 for 2009 and you earned $14,160, your total income would be $23,160. But say you earned $20,000 -- that would put you $5,840 over the 2009 exemption and would cost you $2,920 in benefits. So instead of $29,000, you'd end up with a total of just $26,080.

The rules are different for those who reach full retirement age in 2009. For earnings made in the months before the month you hit full retirement age, you'll lose $1 in benefits for every $3 above $37,680. Once you hit the month of your full retirement age, your earnings will no longer be subject to the test.

Any benefits you forgo to the earnings test are not actually lost. When you hit full retirement age, your benefit will be increased to account for the "lost" benefits.

Extra time in the workforce could increase your Social Security benefit overall. The records of beneficiaries who work are reviewed annually; if your new job results in one of your highest earning years, your benefit will be refigured.

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Pension. If you're receiving a monthly pension payment and go to work for a different employer, there's no impact on your payout. But if you return to work full-time for your former employer, ask the company how it will handle your pension. There are three possible ways work could affect your benefit, says David Godofsky, a partner at law firm Alston and Bird, in Washington, D.C.

The company could continue to pay your pension on top of your new salary. The company could suspend your pension, but you would earn additional pension credits for extra years of service and compensation. Or the company might suspend your pension and give you actuarial increases, which would compensate you when you re-retire for the payments you won't be getting while you're working again. In either of the latter two cases, once you retire again you may end up with a higher monthly benefit.

For those who are returning to their old employer part-time, generally the company can't suspend monthly payouts. Nor can it make you repay a lump-sum payout. If the company's pension plan is still operating, Godofsky says, you could earn credits for an additional pension.

Medicare and health benefits. Working even part-time might make you eligible for employer health insurance. If you don't yet qualify for Medicare, employer insurance could save you hundreds of dollars a month, says Lynn Mayabb, senior managing advisor at BKD Wealth Advisors, in Kansas City, Mo. Even if you lose Social Security benefits to the earnings test, the value of health insurance could more than make up for lost benefits.

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Those with employer coverage who are nearing 65 can delay signing up for Medicare until retiring again. Or you can enroll in all or part of Medicare. Because Part A hospital benefits are free, you can elect to take just Part A. Part B outpatient benefits have premiums, so you can turn down Part B for now. You can sign up for Part D drug benefits if you have Part A. Once you leave your job, you have up to eight months following the month your employer coverage ends to enroll in Part B without a penalty.

If you are on Medicare now, check with the federal agency and your new employer on how government and employer benefits would be coordinated. You can call Medicare's Coordination of Benefits customer-service center at 800-999-1118.

Run through your options to find out which alternative offers the best coverage and the best price. If the employer insurance covers your needs, you might drop Part B and Part D to save on premium costs; if you follow Medicare's rules, you should be able to re-enroll without penalty. Or you might choose to stick solely to your government coverage.

Those who currently receive retiree medical benefits from a former employer should ask that employer about the impact of returning to work, says Godofsky. There's a possibility you will jeopardize those benefits if you're no longer retired. Even if you return to the same employer and go back on its health plan, when you re-retire you might not be able to restore your retiree health benefits if the company no longer offers them.

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Retirement-savings accounts. If you're headed back to work to rebuild your IRA, be aware that starting with the year you reach age 70 you cannot contribute to a traditional IRA. But you can contribute to a Roth IRA as long as you have earned income. To contribute the maximum amount of $5,000 plus a catch-up contribution of $1,000 for those 50 and older to a Roth IRA, you can't earn more than $105,000 if you're a single filer or $166,000 if you file jointly.

Unlike traditional IRAs, there is no age limit for contributing to a 401(k) if you're an employee. "Once you're over age 21, companies can't use age to keep you out," says Godofsky.

Congress has suspended required minimum distributions for 2009 only. Once you reach age 70, you have to take an IRA RMD annually even if you're working. However, if you're returning to a former employer, you can suspend withdrawals from a 401(k) you have at that employer. But you must take withdrawals from company plans that you have at other former employers.

Tax implications. More earnings could put you in a higher tax bracket. "It's important to have a good assessment of the net impact of work," says Craig Skeels, managing director of Apex Wealth Management Group, in Oxnard, Cal.

Also, up to 85% of your Social Security benefits are taxable if your "combined income" reaches certain levels. Combined income is your adjusted gross income, plus nontaxable interest and half of your Social Security benefits.

But if you're eligible for a 401(k) at your new workplace, you could reduce the whammy of higher taxes and boost your nest egg. "With a defined-contribution plan, it is a nice opportunity to add additional dollars on a tax-deferred basis," Skeels says, and "you could reduce tax on employment income."

Say you go back to work when you are age 50 or older. You could put as much as $22,000 into your 401(k) and $6,000 into a traditional IRA if you're younger than 70. The pretax contributions would reduce your taxable income and help keep your tax bill in check.

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