Leaving Retirement? Three Things to Consider Before You Unretire

Going back to work after retiring isn’t something many retirees think about when they enter their golden years, but given the current state of our economy, leaving retirement is becoming more common.

Due to high inflation and rising interest rates, many retirees are withdrawing more from their retirement accounts.

For some, this means it’s becoming more challenging to make ends meet, and the idea of generating extra income is tempting. While unretiring may help you get your finances back on track, there are a few financial implications that can catch you by surprise.

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1. Social Security

Have you been collecting Social Security checks throughout your retirement? If so, it may affect your decision to return to work. The most significant factor in how your Social Security benefits will be impacted is whether you've reached your full retirement age.

If you’re receiving Social Security benefits but haven’t yet reached age 67, you can earn only $21,240 in 2023 before your benefits begin to be reduced. If you earn more than that amount, your benefits will decrease by $1 for every $2 you earn.

I tell my clients that once they reach full retirement age, there are no income limits or penalties. If you had any Social Security money withheld because you were earning too much prior to turning age 67, you'll get those withheld benefits as a credit after you reach full retirement age.

2. Medicare

Retirees who decide to return to work must be careful with their Medicare coverage. Medicare Part B and Part D premiums are based on your income, so if you begin making more money, this could increase your premium costs.

If you work for a larger company that offers a health care plan that is acceptable as primary coverage, you can drop your Medicare Part B and re-enroll later without penalty. If you decide to drop Medicare, you have eight months to re-enroll once you are done working or face a late enrollment penalty.

It is also possible to have both Medicare and private health insurance through your employer. One will be considered your primary coverage, and the other will be secondary. You have to remember, however, that if you do have both, you cannot contribute to a health savings account (HSA) through your employer without facing a tax penalty.

If you have both Medicare and an employee health care plan, how will coverage for medical costs work? This all depends on how big your company is. If your employer has more than 20 employees, that coverage will pay the bill first. If there are fewer than 20 employees, Medicare covers the costs.

3. Changes in your tax bracket

Taxes can be a complicated topic for most people, but they can get especially tricky if you return to the workforce out of retirement. While many who choose to unretire are doing it for income purposes, what if that extra cash pushes you into a higher tax bracket? This is especially true for those who have additional income coming from retirement accounts, pensions or Social Security.

You might consider converting some of your tax-deferred retirement accounts to Roth versions, in which you pay taxes upfront. That gives you several advantages. You don’t have to pay income tax when you withdraw money from those accounts because you already paid the tax when you contributed to them.

You also don’t have to take minimum distributions from those accounts, which means you aren’t needlessly adding income that might push you into a higher tax bracket. This is a great scenario where a financial adviser can help you see the big picture and find ways to lower your tax burden should you decide to unretire.

Heading back into the workforce out of retirement is a lot like ending a well-planned vacation early, not something many of us want to do! Avoiding unretirement and saving enough to enjoy your golden years is an achievable goal, but you need a financial plan specifically designed for you in order to do so.