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How ‘unretiring’ to go back to work can affect your Social Security benefits

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The newest trend in retirement doesn’t have anything to do with a beach or eccentric hobbies — it’s about getting back into the workforce.

More than half of workers nearing retirement in the next five years plan on returning to work at some point, according to a survey by Home Instead. The phenomenon, referred to as “unretirement,” is redefining how Americans view their senior years. Seniors aren’t heading back to work just for the paycheck — they’re also returning to the workforce to feel fulfilled, give back to the community and keep busy.

But does heading back to work mean giving up Social Security benefits? The answer depends on how old a person is and what their current benefits are.

Here are four key things “unretirees” should consider when it comes to their Social Security benefits before switching back to being a worker.

1. A portion of your Social Security income may be withheld

Age is the biggest determining factor for how Social Security benefits would be altered, should a retiree return to work. Depending on where someone falls in regards to “full retirement age,” benefits may be withheld or adjusted.

The earliest a person can start receiving Social Security benefits is 62, but that doesn’t mean they are considered to be at full retirement age.

Full retirement age is 66 for people born between 1943 and 1954; those born in 1955 have two months added for every birth year until the full retirement age reaches 67, which is the full retirement age for those born in 1960 or later, according to the Social Security Administration (SSA) website. (Here’s a full chart of birth years and full retirement ages.)

Those at full retirement age for the entire year they return to work, while still receiving benefits, have $1 deducted for every $2 earned above the annual limit. For 2019, the annual limit is $17,640.

For those working during the year they reach full retirement age (but haven’t reached it yet), the deductions are slightly less. The SSA will deduct $1 for every $3 earned above an earnings limit of $46,920. The administration adds that only earnings before the month of reaching full retirement age are counted toward the threshold.

2. You might have to pay back any benefits you’ve received

“If you are under 70 years old and decide to come out of retirement within 12 months of applying for Social Security, you can withdraw your application. This requires submitting a form to the Social Security Administration,” says Leslie H. Tayne, Esq. founder and director of the Tayne Law Group, headquartered in New York. “You’ll also have to pay back any benefits you’ve already received, including anything that’s been withheld from checks. If you go this route, you’ll be able to reapply later.”

3. At full retirement age, you’re still eligible for full benefits

If you’re considered to be at full retirement age but choose to return to work, your benefits won’t be affected.

The SSA adds that the benefit amount will be recalculated to “leave out the months when [they] reduced or withheld benefits due to your excess earnings.”

The fate of Social Security has been up in the air. In 2016, the U.S. Treasury revealed the Social Security program was beginning to dip into trusts to pay out benefits. The Treasury estimated the trusts would be depleted by 2034, resulting in a 23 percent benefit cut across all ages and income. Although experts say it’s unlikely the program will go bankrupt.

But will the Treasury ever adjust full benefit earnings to keep the system sustainable?

Tim Adams, a certified public accountant and Social Security adviser, guesses that earnings won’t be affected — but that doesn’t mean there won’t be other methods of reform introduced.

“I do think that a gradual increase in full retirement age will probably be part of any reform,” Adams says. “While adjustments to full retirement age are not currently part of the Social Security 2100 Act introduced by Congressman John Larson, a gradual increase in full retirement age is favored by the Republicans.”

4. Know the special rule for retiring and then unretiring mid-year

Those who choose to return to work mid-year have a special rule applied to their earnings for one year — usually the first year of their retirement.

The SSA gives the following example: If someone retires around June but creates their own business around October, they’ll still receive full benefits for the months they’re considered fully retired — regardless of their total earnings for that year.

The special rule will pay you a full benefits check for any whole month you’re considered retired, under the following circumstances, according to the SSA:

  • Be under full retirement age for all of 2019, you are considered retired in any month that your earnings are $1,470 or less and you did not perform substantial services in self-employment.
  • Reach full retirement age in 2019, you are considered retired in any month that your earnings are $3,910 or less and you did not perform substantial services in self-employment.

The administration defines “substantial services in self-employment” as working more than 45 hours a month to a business, or between 15 and 45 hours to a business in a “highly skilled occupation.”

What is the annual earnings test?

If you’re below normal retirement age, not currently working and receiving Social Security benefits, the earnings test can help you determine how much of your social insurance benefits will be withheld if you return to the workforce.

The SSA adds that any benefits withheld while working aren’t “lost.” Monthly benefits will be increased to account for the time in which your benefits were withheld.

Experts advise workers to use the earnings test as a way to keep the SSA up-to-date on your earnings, and to help avoid any necessary repayments in the future.

“The key to avoiding an unexpected (and unwanted) letter demanding you repay previous benefits due to the earnings test is to provide Social Security with an estimate of how much you expect to earn each year before attaining full retirement age,” Adams says. “If your estimate changes during the year, contact Social Security right away so they can re-adjust if necessary.”

Other things to consider before heading back to work

Social Security benefits aren’t the only financial aspect that are affected by a retiree choosing to go back to work. There are other things, like 401(k)s and taxes, that should be considered.

We asked experts for advice on how unretirees can navigate a number of other tricky financial scenarios:

How going back to work might affect Medicare coverage

Once someone turns age 65, they are automatically enrolled in Medicare Part A, which is usually free and covers hospital insurance.

At 65, people are also eligible for Part B (doctor and outpatient services) and D (prescription costs) if they are receiving Social Security benefits (premiums are deducted from the benefits check).

If you have applied for Social Security benefits while receiving Part B coverage, withdrawing your application will have implications. If you keep the Part B coverage, you will be billed for future premiums — failure to pay them on time will put your coverage at risk of removal.

Also keep in mind that individuals earning above $85,000 are charged more for Part B premiums than the standard $135.50 per month. The Medicare website details monthly payments over multiple income thresholds.

Think about your taxes

If you adjust your Social Security benefits, your taxes will be changed as well.

“Your income determines how much of your Social Security benefits are taxable,” Tayne says. “Additionally, drawing from your retirement savings as well as earning income from a full- or part-time job could affect which tax bracket you’re in, meaning you could owe more.”

Tayne adds that filing jointly affects tax situations, too. Those filing jointly with a combined income of over $44,000 or filing alone with an income over $34,000, 85 percent of Social Security benefits are taxable. For incomes below those figures, 50 percent of the benefits are taxable.

People who return to work after retiring might find it helpful to consult with a tax professional to try and avoid any penalties for inaccurate reporting or withholding come tax season.

Take advantage of 401(k)s

Someone heading back to their career field might want to consider taking a position that offers a 401(k) plan, says Timothy S. Bickmore CFP, director of financial planning and co-founder at LBW Wealth Management. Doing so could increase future wealth.

“The law permits someone who is deemed to still be working to delay their required minimum distributions (RMD) inside a 401(k),” Bickmore says. “This means the individual could delay taking money out of their 401(k) and continue to defer growth into the future.”

Another strategy to stretch retirement dollars further would be to rollover any old 401(k) or IRAs into the new plan, Bickmore says. Rolling over into a single plan allows consumers to delay RMDs on that money as well, giving it the opportunity to grow as you keep working. Not all plans allow rollovers, so be sure to check with your provider.

Check-in on your pension

Although pensions aren’t as common as they used to be, retirees who have them should keep in mind how returning to the workforce might impact them.

“It would be important to look at how this would affect their current or future pension benefit,” Bickmore says. “Every pension is different, be it a union or state pension, so it would be recommended to look specifically at the pension plan’s details.”

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