Are You Retired and Considering Going Back To Work?

With the nation’s economy in turmoil, many retired taxpayers are thinking about going back to work to either supplement their retirement income or to rebuild their retirement savings.  If this applies to you, there are some tax issues you need to be aware of. 

Even though you may already be retired and drawing Social Security benefits, you will still be required to pay FICA and Medicare tax through your employer’s payroll withholding (amounts to 7.65% of your earnings).  If you have self-employment income, you will have to pay both the employer’s and employee’s share totaling 15.3%.

If you are thinking about building your retirement savings back up by making tax-deductible retirement contributions, you should be aware that upon reaching age 70½, a taxpayer can no longer make contributions to a traditional IRA account.  If you are under age 70½, you can make deductible traditional IRA contributions up to $6,000 ($5,000 if under age 50).  However, if you are an active participant in another pension plan (being retired and receiving distributions from a retirement plan is not considered being an active participant), the deductibility of the IRA contributions phases out for adjusted gross incomes (AGIs) between $55,000 and $65,000 ($89,000 and $109,000 for married filers).  Employer-deferred compensation plans, such as 401(k) plans, still allow deductible contributions even after 70½.  Self-employed individuals can contribute to deductible Keogh and SEP plans without age restrictions.

Required minimum distributions (applicable to taxpayers who have reached age 70½) have been suspended for 2009, so that taxpayers do not have to withdraw from pension plans that have dropped in worth because of declining investment values.  This hopefully permits the accounts to regain some of their lost value before distribution must be made again in 2010.  However, the decision to skip the 2009 distribution should be made carefully based on individual circumstances, since the distribution could be brought into income with little or no tax for lower-income individuals.  On the other hand, retirees in higher tax brackets can benefit from skipping the 2009 distribution.  If you are returning work, the additional income may provide enough current cash flow to enable you to skip the required minimum distribution for 2009.

Social Security benefits can be tax-free, 50% taxable, or 85% taxable based on the taxpayer’s other income.  Thus, your decision to resume working may, in fact, increase the tax on your SS benefits. 

Generally, Social Security (SS) benefits are not taxable until the AGI (without Social Security income) plus 50% of the Social Security income, tax-exempt interest income, and certain other infrequently encountered additions exceed a specific threshold.  The threshold is $32,000 for married taxpayers filing jointly, zero for married taxpayers filing separately, and $25,000 for all others.  As the income increases, the 50% becomes 85%.  Taxpayers in this transition range are generally in the 15% tax rate, and each additional $1 of income could cause as much as $.85 of SS benefits to become taxable.  This effectively raises the overall tax rate from 15% to 27.75% (15 (.85 x 15)).     

Even though going back to work seems simple enough, it can have some significant and often overlooked tax consequences.  If you are considering going back to work and need to decide whether or not to take the 2009 RMD or make retirement contributions for 2009, you are encouraged to seek assistance from this office to develop an appropriate tax-beneficial plan. 

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