Working in Retirement—A Rulebook

Many people in the United States are continuing to work during retirement for a number of reasons—from fulfilling a personal goal, to maintaining social connections, to doing something that provides a sense of purpose. A paycheck also can be a major incentive for those who continue to work after normal retirement age.

If you are a UC retiree and a member of UCRP receiving a monthly retirement benefit, you’re eligible to be considered for UC reemployment. But there are a few financial rules and regulations to keep in mind if you decide you want to return to work at UC after you retire.

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 866-682-7787 for details.
  • Distributions. You’ll be subject to the plans’ distribution rules. That means you won’t be able to take distributions from your DC Plan pretax account while you’re working, but you can take a distribution from your 403(b) Plan account if you are at least 59½, and from your 457(b) plan if you are at least 70½.
  • Minimum Required Distributions (MRDs). Minimum required distributions (MRDs) from a workplace retirement savings plan are generally required beginning at age 70½. But if you are working when you reach age 70½, you won’t need to take MRDs from your UC 403(b), 457(b), and DC Plan accounts until after you stop working. Note that you will need to take MRDs 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 MRDs from your UC plan accounts, your MRDs 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. If you choose to receive benefits before you reach full retirement age and continue to earn income, you can earn up to $16,920 in 2018 without a reduction in your benefit amount. If you haven’t reached full retirement age and you earn more than that limit, Social Security will deduct one dollar from your benefits for every two dollars you earn above the threshold.

If you reach full retirement age during 2018, your earned income limit will rise to $44,880 and one dollar in benefits will be deducted for every three dollars you earn above the limit until the month you reach full retirement age. In truth, you don’t actually lose any of your benefit, though. The Social Security Administration will recalculate a permanent increase when you reach full retirement age that covers any docked funds.

Continuing to work in retirement can even 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 study, couples retiring at age 65 this year are expected to incur $275,000 in health care costs on average during retirement.1 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-free2 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 2017 Fidelity analysis performed by its Benefits Consulting group. Estimate based on a hypothetical couple retiring in 2017, at 65 years old, with average life expectancies of 85 for a male and 87 for a female. Estimates are calculated for “average” retirees but may be more or less depending on actual health status, area of residence, and longevity. The Fidelity Retiree Health Care Costs Estimate assumes that 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. Life expectancies are based on research and analysis by Fidelity’s Benefits Consulting group and data from the Society of Actuaries, 2014.

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

Fidelity and UC do 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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