Three Surprising Downfalls of Working During Retirement, by Brad Furges
There’s no doubt that there are many advantages of working during retirement. Holding down a job when you retire will give you additional income, thereby reducing the burden on your savings. It also serves as a form of entertainment.
The majority of seniors find it challenging to leave their full-time work because they will no longer have a place to go every week. Working during retirement helps you organize your days while providing an activity that gives your money instead of spending money.
Despite the advantages of working during retirement, you may be at risk if you work in retirement unprepared. Below are the three potential downfalls you should know.
- A portion of social security benefits might be withheld
Suppose you have attained the full retirement age for social security; your earnings will not affect your social security benefits. However, suppose you have been claiming your benefits before you reach the FRA. In that case, your benefits may be withheld by the social security administration, suppose your earnings exceed the specified threshold, and this threshold changes every year.
In 2021, your earnings threshold is $18,960. Once your earnings exceed this amount, your benefits will be withheld by $1 for every additional $2 you earn. Suppose you will reach the full retirement age in 2021, your threshold increases to $50,520. Beyond this threshold, $1 in your social security will be withheld for every $3 you earn. You need to know that your withheld benefits will not be lost for life because you will still get them back when you reach the full retirement age (FRA).
- You may pay social security taxes.
Suppose your only source of retirement income is social security; you may not pay taxes on your benefits. You will start to pay taxes on your provisional income (addition of your non-social security income and half of your total yearly benefit) as soon as it exceeds a certain amount.
If you are single, you may spend 50 percent of your benefits on taxes if you have a provisional income between $25,000 and $34,000. If your provisional income is above $34,000, you will pay more in taxes. If you are married, and you have a provisional income between $32,000 and $44,000; you may spend 50 percent of your benefits on taxes.
Sure, you’ll have more money if you have a part-time job, and these earnings may increase your provisional income until you exceed the specified threshold. Thus, it would help if you considered these taxes before making your decision.
2. You may pay higher taxes on retirement plan distributions.
The general rule is that the higher your retirement income, the higher your tax bracket. Engaging in a part-time job during retirement can push you into a higher tax bracket. This means that you will pay higher taxes on your 401(k) or IRA distributions. However, if you save in a Roth account, your withdrawals will be tax-free, and you can earn any amount even after retirement.
No doubt working during retirement has many benefits, and it can become a necessity in some cases. Suppose you want to work after retirement, you must consider the various social security and tax implications of doing so if you don’t want to pay more taxes.
