It’s not uncommon for retirees to continue working after they depart their last “official” roles. Some may take on contract or freelance work. Others may remain in their fields at scaled-back rates and schedules. Still more may opt to enter the gig economy as a way of keeping busy.
The bottom line is that many retirees aren’t simply playing golf all day or sitting idle. Increased levels of activity and income are, of course, positives, but working in retirement brings up a host of issues retirees need to be aware of.
For example, retirees that are still working, even part-time, may see adjustments made to Medicare and Social Security due to that income stream.
“And there are additional rules governing the way you use the money in your tax-advantaged retirement savings,” says Rob Williams of Charles Schwab. “None of this should be taken as a reason not to work if you want to do it. But it is important that you understand how the rules could affect you should you get back on the job.”
Another interesting element about working in retirement, particularly for workers that are just coming off employer-sponsored retirement plans or those that have individual retirement accounts (IRAs) is that these individuals can contribute to retirement plans at their new jobs.
“In most cases, under current law, you should be able to contribute to your employer’s qualified retirement plan regardless of your age. If you meet relevant income limits, based on recent changes to tax law, you can also contribute to a traditional IRA or Roth IRA if you have earned income,” adds Williams.
Working in retirement doesn’t affect required minimal withdrawals from IRAs, which investors need to take at age 72. However, there’s a different set of guidelines for retirees that re-enter the workforce and participate in 401(k) plans.
“The rules for qualified employer plans, such as 401(k)s, are different,” according to Williams. “If you continue to work past age 72, and do not own more than 5% of the business you work for, most plans allow you to postpone RMDs from your current—but not a prior—employer’s plan until no later than April 1 of the year after you finally stop working. If you have a 401(k) from a prior employer, you may still be subject to the RMD requirement. Check with your plan administrator for both your new and prior employers.”
At the end of the day, there are plenty of benefits for retirees that work and bring in some extra income. This topic is also an avenue where advisors should engage clients to discuss proper planning and the potential for reduced government benefits.
For more on income strategies, visit our Retirement Income Channel.