Will working during retirement affect your benefits?

You did it! You reached retirement, and that’s something to celebrate. After some time, however, you may decide that you’d like to continue working, either to maintain social relationships, reach a goal, or even to receive a paycheck. No matter the reason, know that if you are a UC retiree and a member of the UCRP receiving a monthly retirement benefit, you’re eligible to be considered for UC reemployment.

Before you decide to return to work at UC after you retire, it’s a good idea to understand the rules and regulations that may affect your benefits.

UC RETIREMENT SAVINGS PROGRAM (403(b), 457(b), AND DC PLANS)

In general, you can contribute to the UC 403(b), 457(b), and DC Plans as long as you’re working at UC, even if you work part time. Just make sure you understand the rules around loans and distributions.

  • Loans. If you’re repaying a 403(b) loan, your loan repayments will be deducted from your paycheck. Note that your reemployment may affect your repayment schedule. Call a Fidelity representative at 1-866-682-7787 for details.
  • In-service Distributions. You’ll be subject to the plans’ in-service distribution rules. That means that while you're working, withdrawals are allowed from the 403(b) Plan only if you are age 59.5 or you incur a financial hardship. In-service Withdrawals are allowed in the 457(b) Plan only if you are age 59.5 or you incur an unforeseeable emergency. You can withdraw your after-tax contributions from the DC Plan for any reason at any time. 
  • Required Minimum Distributions (RMDs). Required minimum distributions (RMDs) from a workplace retirement savings plan are generally required beginning at age 73 (as of January 1, 2023). But if you are working when you reach 73, you won’t need to take RMDs from your UC 403(b)1, 457(b), and DC Plan accounts until after you stop working. Note that you will need to take RMDs from any non-UC employer plans, if you haven’t rolled them into one of your UC retirement accounts yet. And if you have already begun taking RMDs from your UC plan accounts, your RMDs will continue, even if you return to work.

UC RETIREMENT PLAN (UCRP)

Because UCRP must comply with IRS pension distribution rules, for the most part UC retirees are allowed to return to work only under certain limited circumstances. In most cases, you won’t accrue new service credit or contribute to UCRP during your reemployment period when you return to work for UC after retirement.

You can find a complete discussion in the Returning to UC Employment After Retirement fact sheet.

SOCIAL SECURITY BENEFITS

Another plus of working longer is that you may be able to delay filing for Social Security benefits. While you can begin taking monthly Social Security retirement benefits at age 62, in general, the later you claim, the more you qualify to receive. If you can delay Social Security beyond your full retirement age, your Social Security benefits can increase by 8% a year up to age 70. View your full retirement age on ssa.gov.

Social Security does, however, place some restrictions on the amount you can earn.2

  • If you choose to receive Social Security benefits before full retirement age: If you have earned income higher than $22,320 in 2024, your Social Security benefits will be reduced by $1 for every $2 of earned income over the limit. You can earn income up to $22,320 in 2024 without a reduction in your benefit amount.
  • If you choose to receive Social Security benefits and reach full retirement age during 2023: Your earned income limit for the year will rise to $59,520. Note that your benefits will be reduced by $1 for every $3 of earned income over the limit, until the month you reach full retirement age.

But these benefits are not truly "lost."

  • If your benefits have been reduced due to earning, your monthly Social Security check will be increased after your full retirement age to account for benefits withheld earlier due to excess earnings.
  • Note that "earned" income includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they're all based upon employment. Earned income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of "unearned" income.

Continuing to work in retirement can help boost your Social Security benefits because they are calculated using your highest 35 years of earnings. Keep in mind that your actual benefit could be subject to federal and state taxes.

HEALTH AND MEDICAL

According to a recent Fidelity study,3 couples retiring at age 65 this year are expected to incur $315,000 in health care costs on average during retirement.4 This estimate assumes traditional Medicare coverage and doesn’t include common added expenses such as nursing home or long-term care. Fortunately, as with other expenses in retirement, medical expenses are something you can plan and save for, especially if you start early.

As long as you work at UC, even part time, you will continue to have access to the full range of medical options UC provides. If you're eligible, UC's retiree insurance and Medicare can pay a large portion of your health care expenses in retirement. However, if you've retired from UC and are eligible for UC's retiree insurance, you should carefully consider the impact of your return to work on those benefits. Generally, returning to work at UC is limited to less than 17.5 hours per week, but if you return to a position which works, on average, more than this, then your retiree insurance may end and you may need to receive insurance benefits as an employee. This can impact your costs and coverage, especially if you are eligible for Medicare. To learn more, read Returning to Work After Retirement.

One of the best ways to help cover health care costs in retirement is through the Health Savings Account (HSA) that comes with the UC Health Savings Plan. HSAs don’t have a use-it-or-lose-it rule, so you can keep some of your HSA money for the future and use some to pay qualified medical expenses now. Your HSA contributions, earnings, and distributions are tax-free5 if used for qualified medical expenses—that’s a triple tax advantage you don’t get anywhere else. Plus UC provides an automatic, annual contribution to your account—$500 for an individual or $1,000 for a family.

IMPACT ON TAXES

It’s possible that continuing to work in retirement might push you into a higher tax bracket, especially if you begin taking taxable distributions from your pension benefit that count as income on top of your salary. Knowing how close your current earned income level may be to the next tax bracket can help avoid an unpleasant surprise.

If you need more money than you’re earning, remember that withdrawals from your pretax money in the UC 403(b), 457(b), and DC Plan will be subject to income taxes. To help minimize your taxes, consider using funds from after-tax accounts—checking, savings, or brokerage accounts—first.

TAKE THE NEXT STEP

If you’re already working during retirement—or just considering it—there are steps you can take to ensure you’re playing by the rulebook.

 

1 “RMDs are not required from Roth contributions to the 403(b) Plan.

2 "Social Security Basic Facts," SSA.gov, June 2023.

3 “How to plan for rising health care costs,” Fidelity Investments, www.fidelity.com, June 21, 2023.

4 Estimates based on a hypothetical single person or opposite-sex couple retiring in 2023, 65-years-old, with life expectancies that align with Society of Actuaries' RP-2014 Healthy Annuitant rates projected with Mortality Improvements Scale MP-2020 as of 2023. Actual assets needed may be more or less depending on actual health status, area of residence, and longevity. Estimate is net of taxes. The Fidelity Retiree Health Care Cost Estimate assumes individuals do not have employer-provided retiree health care coverage, but do qualify for the federal government’s insurance program, Original Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Original Medicare. The estimate does not include other health-related expenses, such as over-the-counter medications, most dental services and long-term care.

5 With respect to federal taxes. State taxes may or may not apply.

Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and are subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

The University of California intends to continue the benefits described here indefinitely; however, the benefits of all employees, retirees, and plan beneficiaries are subject to change or termination at the time of contract renewal or at any time by the University or governing authorities. If you belong to an exclusively represented bargaining unit, some of your benefits may differ from the ones described here.

Investing involves risk, including the risk of loss.

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