Some of us retire early and some wait until their full retirement. However, there are some of us that will continue to work well past the age of our full retirement, if they ever retire at all. Some people find working enjoyable and fulfilling, others will continue working because they don’t have enough saved for retirement. If you are thinking of extending your employment past your retirement age there are a few things you should know. Such as;
* Required minimum distributions (RMD). If you own a traditional IRA you will still be required to take RMD’s when you turn 70 ½ years old. The first RMD must be taken by April 1 of the year after the year you turn 70 ½, and all remaining RMDs will be due by the close of their particular calendar years.
The amount of your RMD’s is calculated using the balance in your account and life expectancy. If you do not take your RMD in full by the deadline, you will be faced with a 50% penalty. For instance, if you were to receive $5,000 and didn’t take the full amount of the RMD by the deadline you would automatically lose ½ or $2,500 at that time.
Just because you are still working full time when you turn 70 ½ and own an IRA, it does not mean that you are exempt from taking your RMD. However, if you are still employed and own a 401k through your employer when it’s time for your RMD to begin, you may be able to delay the distributions until you are no longer employed. This is generally true unless you own 5% or more of the business that backs your 401k plan.
* Social Security. Unless you take your social security early (at 62) most full retirement ages are set at 66 or 67. If you see yourself working to the age of 70 you will get an instant 8% increase for each year over your full retirement age. After the age of 70, there is no extra benefit to not take your social security because retirement credits will no longer accrue past the age of 70. If you decide to continue to work and don’t need the extra income you can grow your money in a Roth IRS tax free.
* Taxes. Those that continue to work into their 70’s should prepare themselves for a tax shock once the RMD and Social Security benefits begin. This is because your benefits and your salary will likely increase your tax rate. Not only will you owe tax on your income but you may also be taxed up to 85% if your monthly benefits. If you have further questions about taxes and your Social Security contact your local office or visit the Social Security website at https://www.ssa.gov/
One way to avoid that big tax surprise is to consider converting your traditional IRA to a Roth IRA to offset RMD’s and taxes at the time of withdrawals. Though certain taxes are unavoidable, having a good tax plan in place will help you avoid any big surprises later on. If you need assistance contact our office at (260) 497-9761 to schedule an appointment would our advisors.