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The Tax Perils of Working After 65

Today’s society sends older workers signs—some subtle, others not so much—that it’s time to hang it up at age 65, says Olivia Mitchell, professor of business economics at the Wharton School of the University of Pennsylvania. Americans can start collecting Social Security benefits as early as age 62; they can start withdrawing money from their IRAs without penalty as young as age 59 and a half; at age 65, many partners are ushered to the door of their law firms. Both employers and older employees respond to these social cues, Mitchell says: the former with age discrimination, and the latter with the belief that they’re past their prime and shouldn’t bother keeping up their skills and connections. Yet “the notion that just because you’re 65 you have to sit on the porch and rock is completely obsolete,” Mitchell says.

Words to live by. But those who buck the norms and remain employed past 65 have some financial housekeeping to attend to, as Morningstar’s Christine Benz reminds us in an article  today. Working has implications for Social Security benefits, Social Security taxation, IRA/401(k) contributions, 401(k) required minimum distributions, and health care coverage.  In the “who knew” category: The income you collect, tax-free, from municipal bonds is counted in the calculation of your total income for Social Security purposes—and can play a role in triggering taxes on the Social Security benefits.  If workers’ income from wages, investments and retirement-plan distributions is lower than $25,000 a year for singles and $32,000 for married couples, Social Security benefits are tax-free. But they’re taxable above that. In fact, if total income is above the highest thresholds of $34,000 for singles and $44,000 for couples, up to 85% of Social Security benefits become taxable.

Bottom line: if you’re working and your total income exceeds the limit, it’s best to postpone taking Social Security, Benz recommends. If you’re actively working, you can also defer 401(k) plan distributions past age 70.5, provided your plan allows it, which can help keep the taxman at bay.


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About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.