Retirement & Work: 3 Unexpected Challenges to Consider

There are plenty of good reasons to hold down a job in retirement. Not only can working provide extra income and thereby compensate for a lower retirement plan balance, but it can also serve as entertainment. Many people find it difficult to go from a full-time work schedule to having no place to be all week. Working in some capacity could help structure your days and give you an activity that earns you money instead of requiring you to spend it.

That said, working during your senior years could actually come back to bite you if you aren't prepared. Here are three pitfalls to bear in mind.

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1. You may have some Social Security benefits withheld

If you've reached full retirement age (FRA) for Social Security purposes, you can earn as much money as you'd like without that income impacting your benefits. If you're collecting Social Security prior to FRA, though, you'll risk having benefits withheld if your earnings exceed a certain threshold.

This threshold changes from year to year. In 2021, you can earn $18,960 from a job without impacting your benefits. From there, you'll have $1 in Social Security benefits withheld for every $2 you earn. If you'll reach FRA in 2021, that limit increases to $50,520. Beyond that point, you'll have $1 in Social Security withheld for every $3 you earn. Those withheld benefits won't be lost permanently, but you'll need to wait until FRA to get that money back.

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2. You may be taxed on your Social Security income

If Social Security is your sole income source during retirement, you may not get taxed on your benefits. Federal taxes on benefits do apply once your provisional income (your non-Social Security income plus half of your total annual benefit) exceeds a certain threshold.

If you're single with a provisional income between $25,000 and $34,000, you may be taxed on up to 50% of your benefits. Beyond $34,000, you could be looking at taxes on up to 85% of your benefits. If you're married, you'll risk taxes on up to 50% of your benefits with a provisional income of $32,000 to $44,000. Beyond $44,000, married people risk taxes on up to 85% of their benefits.

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Earning money from a part-time job could propel your provisional income to a level where taxes on your benefits apply. It may still be worth holding a job, but you'll need to account for those taxes when deciding.

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3. You could pay higher taxes on retirement plan distributions

The higher your income in retirement, the higher the tax bracket you'll fall into. Working during your senior years could bump you into a higher bracket, causing you to pay more tax on your IRA or 401(k) distributions. That said, if you keep your retirement savings in a Roth account, withdrawals will be yours to enjoy tax-free, and in that case, holding down a job won't impact your distributions.

There are plenty of benefits to working in retirement, and in some cases, doing so may be a necessity. If you're going to hold down a job, be aware of the various tax and Social Security implications so you're not caught off guard.