There are plenty of good reasons to hold down a job in retirement. First, there’s the obvious one — working can boost your income and make it easier to pay your bills. And taking a job is something worth considering if you don’t have much in the way of an IRA or 401(k) plan balance by the time retirement begins.
Working as a senior could also help fill your days. Many people don’t deal well with a lack of structure, and so taking a job serves the important purpose of giving retirees something interesting to do with their time.
Now if you’re going to work in some capacity, you’re probably aware that you won’t get to keep your paycheck from your job in full. Just as wages are subject to taxes before retirement, so too are they subject to taxes during it. But you may be surprised to learn that working as a senior could leave you in a situation where your Social Security benefits are taxed as well.
Understanding how Social Security benefits get taxed
If Social Security is your only income source, you’ll generally get to keep those monthly benefits in full. But once you bring additional income into the mix, the potential for taxes exists.
Whether you’ll be taxed on your benefits hinges on your provisional income. Your provisional income is calculated by taking half of your annual Social Security benefit and adding that to your non-Social Security income.
Some forms of non-Social Security income are exempt from that formula, like Roth IRA withdrawals. But traditional retirement plan withdrawals count toward it, as does most pension income.
So what are the thresholds for having Social Security benefits taxed? If you’re single, a provisional income of $25,000 to $34,000 means you may be taxed on up to 50% of your benefits, while a provisional income above $34,000 means you may be taxed on up to 85% of your benefits.
If you’re married filing a joint tax return, a provisional income of $32,000 to $44,000 means you could face taxes on up to 50% of your benefits. Beyond $44,000, you could be taxed on up to 85% of those benefits.
Now, here’s where working during retirement comes in. If you earn enough from your job, you could propel yourself into a category where taxes on your Social Security benefits start to apply. And while that isn’t necessarily a reason not to work, it is something you should prepare for.
Gear up for taxes
Taxes are unavoidable no matter your age, and there are many types of senior income that the IRS can get a piece of. But many retirees are shocked to learn that Social Security payments have the potential to be taxed.
If working during retirement causes you to pay taxes on your benefits, you’ll need to crunch some numbers to see if holding down a job is worth it financially. If you’re able to boost your income nicely, then the hit to your Social Security benefits may be worth it. Similarly, the mental health benefits of having someplace to go during the week may be worth a higher tax burden. But the key, either way, is to know what to expect as far as taxes on Social Security go so you’re not caught off-guard.
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