Planning to work in retirement or already doing so? You’re not alone. A survey found that 1 in 6 retired Americans are thinking about going back to work.1 Why is this becoming an increasingly popular decision? Working into retirement can help you build retirement savings and, in some cases, provide continued access to health care insurance.
But there are restrictions in place that can directly impact your finances.
WHAT YOU NEED TO KNOW
If you are working in retirement—or plan to—and you’ve already begun taking Social Security benefits, you need to be aware of how your Social Security income may be taxed and of the earned income thresholds that determine any reductions in benefits.
Here are four tips that can help you preserve the retirement savings you worked hard for.
1. THE DIFFERENCE BETWEEN EARNED AND UNEARNED INCOME
After you retire, you will hear the terms “earned” income and “unearned” income a lot. Earned income represents any wages, bonuses, vacation pay, and commissions; while unearned income represents all income that is not earned, such as investment income, pension payments, and government retirement income—including Social Security.
Nine out of 10 Americans aged 65 or older receive Social Security benefits, according to the SSA's most recent basic facts sheet.2 Chances are you will, too. That means you will likely be subject to the following restrictions:
- If you claim your Social Security benefits at age 62 (the earliest age you can claim) and choose to continue to work, you will be given an earnings restriction until you reach your full retirement age (65 to 67, depending on when you were born). If you earn income in excess of your earnings limit ($22,320 in 2024), your benefits will be reduced by one dollar for every two dollars of earned income.
- If you reach your full retirement age during 2024, your earned income limit rises to $59,520 and the benefits reduction becomes one dollar for every three dollars earned over the limit until the month you reach your full retirement age.
- After you turn 67, there are no earnings limits or benefit reduction based on your earned income.
These benefits are not truly “lost,” however. If your benefits have been reduced due to earning too much prior to reaching your full retirement age, you will get these benefits back at your full retirement when your monthly Social Security check will be increased to account for benefits withheld earlier due to excess earnings.
2. THE INCOME TAX IMPLICATIONS
Social Security benefits themselves are subject to federal income taxes if they exceed certain levels of "combined income." Combined income generally consists of your adjusted gross income (AGI),3 nontaxable interest, and one-half of your Social Security benefits.
Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation. Note that California does not currently tax Social Security benefits, although 13 other states do. For more information, see Income Taxes and Your Social Security Benefits.
| If your tax filing status is: | And your combined income is: | This much of your Social Security benefit may be subject to federal income tax: |
|
Individual filer Joint filer |
Below $25,000 Below $32,000 |
0% |
|
Individual filer Joint filer |
$25,000 - $34,000 $32,000 - $44,000 |
50% |
|
Individual filer Joint filer |
Over $34,000 Over $44,000 |
85% |
3. SOCIAL SECURITY AND MEDICARE TAXES
If you earn any wages in retirement, they will be subject to Social Security and Medicare taxes because there is no age limit on these types of withholdings.
The good news is that these earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.
If you are making much less in retirement than before, could it hurt your benefits? No, because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.