Recent surveys tell us that working during one's post-career years is the new expectation for most retirees.
Three in four responded to a Merrill Lynch/Age Wave poll, last year, affirming that some element of a working life not only figured into their retirement—it would actually make their after-65 lifestyle ideal.
That kind of move toward post-retirement work — and additional income —means that many retirees will also have to think about what happens when they're working and taking benefits such as a monthly Social Security check. Consider the following possibilities.
• Earn enough, all income combined, and it can add up to a pay bump that puts you in higher tax bracket or incurs taxes on your total income that you didn't expect.
• If you're taking Social Security and you earn enough from work that your combined income as the SSA measures it — adjusted gross income plus nontaxable interest income plus Social Security income —crosses a set $25,000–$34,000 threshold you could expose 50%–85% of your Social Security income to taxation.
• If you're taking Social Security but also earning above set annual income limits before full retirement age, you could end up have some or all of your expected SSA checks temporarily withheld.
Point is, post-retirement income as it applies to retirement and taxes can pack some surprises unless you plan and implement some changes to address the government's rules. Read on for a number of key ways you can keep your ideal working-retirement plan from turning into something more complicated — and expensive — than you hoped it would be.
• Defer Social Security. A straightforward approach is to simply wait a bit on the starting date of your Social Security benefits. If your working life and investments can sustain you all the way to age 70, for example, you'll avoid triggering a number of possible circumstances — including the combined income threshold. And a side benefit of waiting until 70 to start taking Social Security is that your eventual payments increase by some 8% per year.
• File and suspend. Another tactic for dealing with the mix of working income and benefits is to file for Social Security and then suspend the payments. Until age 70, if you need access to funds, you can take some or all of the suspended payments as a lump sum — but this is best saved for emergencies, since the payout could affect your taxable income in that year.
• Invest in Roth IRAS. Of course, a tried and true method of protecting income against tax-bracket bumps and the like is to put it into a tax-free instrument such as a Roth IRA. After 70 1/2, however, you'll be required to take minimum Roth IRA withdrawals. You can estimate what those will be ahead of time — the IRS offers RMD calculator on its website — and then plan to adjust other income streams to avoid tax-bracket changes or triggering combined income issues with your Social Security benefits (if you're taking them).
• Keep close track of other distributions. While you've got an eye on Social Security and tax-free holdings, don't let a pre-tax plans in your portfolios surprise you either. 401(k) distributions can change your income scenario when it comes to taxes as well. As long as your working income is sufficient, you might well save on your tax bill by keeping pre-tax plan withdrawals to just what is required. If the situation is such that you need to clear pre-tax distributions from your income scenario altogether, the IRS does let you convert 401(k)s into Roth IRAs. You'll pay taxes on the converted funds once, the year you make the switch.
Take advantage of the planning tools that the IRS and the Social Security Administration offer — the RMD calculator already mentioned but also the online payment projections available once you create an account at the SSA's website.
Creating that ideal mix of retirement and working at the things you feel passionate about is the future for many retirees. It's a rewarding balance, but it does mean that you'll have to become even more proactive about monitoring and controlling how the income you generate affects what's taxable in your holdings, and by how much.
Get registered and learn more
