Delaying retirement affects benefits and taxes
n today’s economic environment, you may decide you have to work beyond the “normal” retirement age. Here’s how extending your work life can affect your taxes and retirement benefits.
“Normal” retirement age is not a fixed number. For social security purposes, the “full” retirement age threshold ranges from 65 to 67, depending on your birth date. However, you can elect to start receiving lower payments as early as age 62, or you can maximize your benefits by forgoing them until you’re 70. Once you reach age 70, there’s no incentive to postpone your benefits further since you’ll already have reached your maximum.
* Earnings limit
If you’re working, you probably should forgo the early payment option. Benefits received before full retirement age will be reduced by $1 for every $2 earned over an annual limit (currently $15,120). However, you will receive a compensating increase when you do reach full retirement age, and your payments will not be reduced thereafter no matter how much you earn.
* Taxable benefits
Whether or not you draw benefits, you’ll continue to pay social security and Medicare taxes on any income you earn from wages or self-employment. Up to 85% of your benefits may become subject to income tax, depending on the amount of your other income.
Medicare eligibility begins the year you reach age 65. The program encompasses four types of coverage: Medicare A (hospital insurance), Medicare B (general medical insurance), Medicare C (Medicare Advantage), and Medicare D (prescription drug coverage).
It’s wise to sign up for Medicare A as soon as you’re eligible. There’s generally no cost, and the program provides supplemental coverage even if you’re already insured at work. Medicare B and D are neither free nor mandatory, but the monthly premiums are reasonable, and either may be used as a stand-alone program or in conjunction with a private plan. If you have “creditable coverage” at work (i.e., coverage that’s at least as good as Medicare), you can postpone signing up for Medicare B and/or D until you’re no longer employed.
Your employer’s plan also may offer Medicare C, which provides for private programs administered under contract with the government. These plans typically merge Medicare A and B benefits with other coverage.
Working beyond retirement age can require several complex decisions. Call us for help with planning the outcome that’s best for you.