A Paycheck's Impact on Retirement Income Benefits
Returning to work can affect Social Security benefits and pension payments, but may also help you build your nest egg.
You've retired, but now you have a chance to go back to work. Perhaps an intriguing opportunity has come your way, or you need to bolster your portfolio. Whatever the case, returning to the workplace can have an impact on the retirement income benefits you're currently receiving. Here's what you need to know before you "unretire."
Social Security. If you have already claimed Social Security benefits but are younger than full retirement age (66 for those born between 1943 and 1954), your benefits are subject to the "earnings test." For every $2 you earn above the annual limit—$15,120 for 2013—the government will withhold a dollar of benefits. The limit is higher in the year you turn full retirement age: In 2013, you will forfeit $1 of every $3 you earn above $40,080, up to the month of your birthday. After that, your income has no impact on benefits. "You can earn as much as you want," says Chris Chaney, vice-president at Fort Pitt Capital Group, in Pittsburgh, Pa.
The benefits you forfeit are not lost forever. At full retirement age, the government will increase your benefit to take into account the benefits that were withheld. For example, if you took benefits at 62 and forfeited 12 months' worth of benefits, at full retirement age the government will recalculate your benefit as if you claimed three years early instead of four years.
Bob Santucci of Carrollton, Va., waded through the complexities of the earnings test when his wife was offered a supervisory job in 2008 about six months after starting her benefit at 62 1/2. Her benefit took a hit for several years. But this year, the Social Security Administration notified his wife by letter that her benefit would be adjusted upward—by about $35 a month. "At that time, you are giving it up, but you do get it back at 66 for the rest of your life," says Santucci, 68.
Be sure to let the Social Security Administration know that you've returned to work. Otherwise, if your tax return shows earnings that should have triggered reduced benefits, you'll either have to pay back the excess in a lump sum or take a cut in future benefits.
Working can increase your benefit if your new salary places you in one of your 35 highest earning years, which is what a benefit is based on. The government will annually refigure a benefit, even if you already started benefits. The salary also will boost the benefit of anyone who had no income during one or more of those 35 years.
You have two options if you want to stop benefits while you're working. Within 12 months of first claiming, you can file to "withdraw your application" for benefits. You will need to repay benefits you already received, but you can restart your benefits later—as if you had never applied. You'll also have to repay any spousal benefits. If you've passed the 12-month window, you can suspend your benefit, as long as you've reached full retirement age. You can then delay restarting your benefit to as late as 70, earning delayed retirement credits of 8% a year.
Retirement accounts. You can boost your tax-advantaged retirement nest egg if you return to work. Because you have earned income, you can contribute up to $6,500 in 2013 to a traditional IRA if you are 50 or older. You also can contribute the same amount to an IRA for a nonworking spouse as long as your earnings cover the contribution.
Once you hit 70 1/2, however, you can no longer contribute to a traditional IRA and you must start taking required minimum distributions, even if you are working. If you fall under the income ceiling (up to $188,000 for joint filers and $127,000 for singles), you can contribute to a Roth IRA. There is no cap on a person's age for contributing to a Roth and no RMDs.
If your employer has a 401(k) plan, you can contribute up to $23,000 a year if you are 50 and older. While you're working, you won't have to take an RMD from that 401(k), even if you're 70 1/2 or older, as long as you don't own 5% or more of the company. You will have to take RMDs from 401(k)s held by former employers, though. If your current 401(k) plan allows it, you could roll money from other 401(k)s or IRAs into your current 401(k) to avoid RMDs, says Travis Sollinger, director of financial planning at Fort Pitt Capital. However, you would be restricted to the investment choices that your current 401(k) plan offers.
Those who return to work through self-employment can turbocharge their nest egg. The self-employed can open a SEP IRA or a solo 401(k), either of which lets you stash up to $51,000 in 2013. Those 50 or older can sock away an additional $5,500 in the solo 401(k). At 70 1/2 or beyond, you can still contribute to a SEP IRA but you must also take RMDs from it.
Annuity and pension payments. Monthly payouts from an immediate or a variable annuity will continue when you return to work. However, if you're just taking periodic withdrawals from a variable annuity's investment portfolio, you do have the flexibility to stop taking those distributions, says Joseph Heider, managing principal of the Ohio Region in Rehmann Financial's Westlake office.
Pension payments from former employers will continue if you're working for a new company. But payments could stop if you're returning to your former employer. "Definitely make an inquiry before going back to work," says Rebecca Davis, legal director for the Pension Rights Center.
Generally, if you return to an employer, the company will suspend your pension. If the plan is still in operation, you may receive actuarial increases. When you re-retire, you could end up with a higher monthly payment. If the pension plan is frozen, you won't earn additional service credits, but you can restart your existing pension once you leave the company for good, Davis says.Pension plan rules snared a client of Davis's who worked for nearly 30 years for IBM in the U.S. The client, who asked not to be identified, says that after leaving his job with IBM, he tried to collect his pension. But because he had gone to work for a subsidiary in Latin America, he was considered to still be working for IBM, and, he says, the plan rules would not allow the company to "double pay" him.
Although he couldn't take his pension, "it worked out well for me—I was making a bit more than in the U.S.," says the client, 69. After about two years in Latin America, he retired and started his pension immediately.
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