I'm a CPA: Here's What Happens to Your Taxes If You Unretire
Though retirement is the end goal after working for most people, it doesn’t always turn out to be permanent. Some retirees return to work for extra income, while others miss the structure, purpose or social connection of a job.
But earning a paycheck again can also change your tax situation, particularly when wages are layered on top of Social Security, pensions and retirement account withdrawals.
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Here’s what tax experts say happens when you “unretire” and what to consider before that first paycheck arrives.
Your New Paycheck Gets Added to Your Other Taxable Income
The biggest change is that returning to paid work adds wages or self-employment income to whatever taxable retirement income you already receive, according to Logan Allec, a certified public accountant (CPA) and owner of Riverside CPA & Tax.
Another concern is that additional wages or self-employment income can push more dollars into a higher marginal bracket "and can also indirectly increase tax by making more Social Security benefits taxable,” said Robertson Abraham, a CPA with R. Abraham Tax & Advisory, LLC.
Allec pointed out that someone already receiving significant retirement income who adds, say, $20,000 in wages may see a relatively modest change. While someone previously living solely on $30,000 in Social Security who earns another $20,000 could go from owing no federal income tax to owing tax on wages and some Social Security benefits.
More of Your Social Security Could Become Taxable
Often “the biggest surprise,” Abraham shared, is that not only can a modest paycheck cause wages to be taxed, “but also more Social Security benefits to enter taxable income.” In fact, up to 85% of benefits could become taxable.
It could also cause one to owe more in taxes than are covered in tax withholdings from the new job, Allec pointed out, “since your earnings could cause your Social Security to be taxed when it wasn't before,” or taxed more than before.
You’ll Pay Payroll Taxes Again
Retirement status doesn't exempt workers from payroll taxes. Abraham said employee wages are subject to Social Security tax up to the applicable wage base and Medicare tax without a wage cap.
Given these potential taxes, retirees going back to work “would be wise to calculate exactly how much money, after-tax, their new job will be netting them,” Allec said. They also need to consider the effect that going back to work will have on their benefits if they have not yet reached full retirement age.
Your Retirement Distributions Can Compound the Tax Impact
A paycheck doesn't replace the tax consequences of pension payments, traditional retirement account withdrawals or required minimum distributions (RMDs). Those income streams can continue alongside wages, creating what Abraham calls a “stacking” effect.
“[W]ages, pension income, IRA distributions and Social Security do not live in separate tax buckets,” he said. “They interact.”
However, certain employees may be able to delay RMDs from the retirement plan sponsored by their current employer while they continue working, subject to the applicable rules.
Your Old Withholding Strategy May No Longer Work
Someone who adds employment income to retirement income and Social Security could find that withholding from the new job doesn't cover the tax liability.
Retirees should review their form W-4 after returning to work. They may also want to withhold from pensions and retirement distributions or their estimated tax payments to make sure they aren’t hit with a tax bill.
Lastly, it's wise to run a year-end projection that includes wages, pension/IRA distributions, RMDs, Social Security taxation, payroll or other taxes, withholding and “estimated tax safe harbors," Allec said.
You May Be Able To Start Saving for Retirement Again
One possible benefit of unretiring is that it could create new opportunities to contribute to retirement accounts. Abraham noted that traditional and Roth IRA contributions no longer have an age limit as long as the compensation requirements are met, while eligible workers may also contribute to an employer plan.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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