Working Past 65? Here’s What You Need to Know
Working long after your peers have retired, can provide some advantages, including larger Social Security benefits and adding to your nest egg instead of emptying it. However, there are some financial pitfalls to be aware of, as you move forward.
Kiplinger’s recent article, “Smart Financial Moves If You Work Late in Life,” advises you to follow these steps to be certain that staying on the job is worth it.
Control your tax bill. Even if you are still getting a paycheck, retirement income will start, and your income could spike. Once you reach age 70, your Social Security benefits stop increasing. As a result, there's no reason not to claim the money. Until then, if your full retirement age is 66, claiming your benefit at 70 gives you a 32% boost to your monthly benefit. When you hit 70½, you must begin taking your required minimum distributions (RMDs) from retirement accounts. You can delay RMDs from a current 401(k) plan (not IRAs or old 401(k)s), if you’re working and don't own 5% or more of the company. Your wages and RMDs can result in up to 85% of your Social Security benefits being subject to tax, and your RMDs are generally fully taxable. Plan ahead and consider converting money from a traditional IRA to a Roth IRA, when you're younger, so you pay taxes at your current tax rate, not your future rate.
Lower your tax bill. Your tax rate could fluctuate based on how long you and your spouse work and when you each collect benefits or start RMDs. In a low income year, wait with your charitable contributions or other deductions for a later year when you anticipate a higher rate.
Keep saving! If you’re earning wages, you can keep contributing to traditional IRAs until the year you hit 70½ and to Roth IRAs at any age, provided that you are under the income thresholds. You’re allowed to put $13,000—or the amount of your taxable compensation, whichever is lower—into your IRA and your spouse's IRA in 2017, if you're both 50+. In addition, you can keep contributing to your current employer's 401(k). The limit for 2017 is $24,000 for those 50 and older.
Watch your pension. If you have a defined benefit plan, review the details of your plan to see if your pension is based on your five most recent years of earnings. If so, you’d probably lose benefits by working part-time at the end of your career. There are some pension plans that won't increase benefits if you work beyond 65, and in some instances, you can't collect until you leave. Once you leave your employer, you might be able to collect your pension, even if you’re working elsewhere. You could also ask your employer if you can retire, take your pension, and then come back as an independent contractor.
Become educated about Medicare. Timing is important here. At age 65, you need to enroll in Medicare Part A, which is free. You can delay signing up for Medicare Part B as long as you are still working and—this is important—as long as you are covered by your employer’s health insurance. However, it has to be the primary payer, which likely will be, if you work for a company with 20 or more employees. If your employer considers Medicare the primary payer and you fail to enroll, you could find yourself to be responsible for medical costs. Check with your HR department and double check: this could be an expensive mistake!
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Reference: Kiplinger (May 2017) “Smart Financial Moves If You Work Late in Life”