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Embracing Your Next Chapter: A Guide for Retirees Returning to Work

As you approach retirement age, the thought of returning to work might be on your mind. Whether you're considering part-time roles or fully immersing yourself back into the workforce, this article is designed to provide insights into the financial aspects of such a decision. We understand that your return to work is a unique journey, and our aim is to help you navigate the tax implications, understand changes to retirement accounts, and make informed decisions about your social security income.

1. Contributing to Your Nest Egg:

If you return to work, you may have the opportunity to contribute to your employer's retirement plan. This can be a 401(k), 403(b), or similar plan. Regardless of your age, you can still make contributions as long as you're earning income. This can help grow your retirement savings and potentially reduce your taxable income.

For traditional and Roth IRAs, there are income limits to contributions based on your modified adjusted gross income (MAGI). For example, in 2024, If you're single, you can contribute to a Roth IRA if your MAGI is less than $153,000. For a traditional IRA, you can deduct your full contribution if you're not covered by a workplace retirement plan, regardless of income.

For 2024 the maximum IRA contribution (traditional and Roth combined) is $7,000 ($8,000 if age 50 or over) up from $6,500 ($7,500 if age 50 or over) for 2023. 

The tax implications of IRA contributions can be complex. If you or your spouse are covered by a retirement plan at work, your deduction may be limited. It's important to consult with a tax professional to understand these rules and how they apply to your situation.

2 . RMDs Made Simple:
If you return to work and are still contributing to your current employer's 401(k), you may be able to delay taking Required Minimum Distributions (RMDs) from that account until April 1 of the year after you retire. However, this doesn't apply to IRAs or 401(k)s from previous employers.

The SECURE Act of 2019 raised the age for starting required minimum distributions (RMDs) from your retirement plans from 70½ to 73 for years 2023 through 2032 after which the beginning age will become 75. This applies to traditional IRAs, but Roth IRAs do not have RMDs during the owner's lifetime.

If you're still working, you may have the option to roll over an old 401(k) or IRA into your current employer's 401(k) to delay RMDs. This can be a complex decision with potential tax implications, so it's important to consult with a financial advisor.

 3. Fine-Tuning Your Financial Mix:

Returning to work can provide additional income, which may allow you to take on less risk in your investment portfolio. You might consider shifting some of your investments from stocks to bonds or other less volatile investments.

Your investment strategy should align with your financial goals, risk tolerance, and time horizon. The additional income from working may allow you to invest more aggressively or it may provide a cushion that allows you to invest more conservatively.

Regularly review your investment mix to ensure it aligns with your changing needs and circumstances. This might include adjusting your asset allocation, rebalancing your portfolio, or making catch-up contributions to your retirement accounts.

4. Pensions and Returns:

Returning to work can have implications for your pension benefits. Some pension plans may suspend benefits if you return to work, especially if you return to work for your former employer.

It's important to connect with your pension plan provider and the human resources department at your new employer to understand any potential impacts on your pension benefits.

If you're returning to a former employer, be sure to understand the specific rules that apply. Some employers may allow you to continue receiving pension payments while working, while others may suspend payments. Be sure to clarify these rules and understand how your benefits or pension payments may be affected.

5. Social Security and Taxes:

Understand how returning to work can affect your Social Security benefits. If you're under full retirement age and earn more than the yearly earnings limit ($22,320 for 2024), your benefits could be reduced. However, once you reach full retirement age, your benefits will be recalculated to leave out the months when your benefits were reduced due to excess earnings.

Be aware of the tax implications of your Social Security benefits. Depending on your combined income (your adjusted gross income + nontaxable interest + half of your Social Security benefits), a portion of your Social Security benefits may be taxable. If you're filing as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your benefits may be taxable.

Consider the impact of your additional income on your Medicare B premiums. Your Medicare premiums are based upon your modified adjusted gross income (MAGI) from your tax return two years prior. Your additional income from working could cause a substantial increase in your Medicare premiums.  As an example, in 2024, a single individual with a MAGI in 2022 of $103,000 or less would have a $174 Medicare premium.  However, if the individual had a 2022 MAGI of between $161,001 and $193,000 their monthly Medicare B premium would be $349.40, almost double. Medicare D premiums also increase with MAGI.  

Planning for the Unexpected:

Consider the need for additional insurance coverage, such as disability or health insurance, given your return to work.

Review your estate plan and update any necessary documents, such as your will, power of attorney, and healthcare directives.

Keep in mind the potential impact of your increased income on your tax bracket and plan accordingly.

Returning to work after retirement can be a rewarding experience, both personally and financially. However, it's essential to understand the potential tax implications and changes to your retirement and Social Security benefits. 

Do you have questions? Feel free to reach out to ensure you're making the best decisions for your unique situation.

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