Not every individual fully retires, as many choose to remain in the workforce. According to T. Rowe Price’s 2022 Retirement Saving & Spending Study, approximately one in five retirees continues to engage in some form of work. This tendency can significantly impact their lifestyle and finances.
Maintaining employment during retirement, even on a part-time basis, provides seniors with a sense of structure and purpose in their daily routines. Additionally, for nearly half of the retirees surveyed by T. Rowe Price, the income generated from part-time work serves as a beneficial financial supplement, enhancing their overall financial security.
These “extra innings” of employment often align with receiving various retiree benefits, including Social Security and Medicare. The combination of earnings from continued work and federal payments can influence overall financial stability. Understanding these dynamics is crucial for anyone contemplating working during retirement.
While most individuals anticipate paying income tax on their work earnings, they may be unaware of how their retirement income can influence the taxation of Social Security benefits and the amount they owe in Medicare premiums. Although this does not impact many working retirees, as we will explain further, it is essential to consider these factors when evaluating the option of working in retirement.
This guide outlines the potential effects of working in retirement on your federal benefits and tax obligations, providing clarity on this important subject.
Understanding Your Medicare Coverage Options in Retirement
Upon retiring, many individuals transition away from the health insurance coverage they received from their employer. If you are at least 65 years old and no longer covered by a group insurance plan tied to your current employment, you become eligible to enroll in Medicare. You can do this either when you reach 65 or during a special enrollment period that occurs after you leave your job and lose that employer coverage.
The Medicare program consists of multiple parts, each with distinct implications for those who plan to work during retirement:
Part A. This component of the program provides coverage for hospital stays. Typically, working retirees do not pay premiums for this Medicare coverage, regardless of their income level. To qualify for this benefit, either you or your spouse must have worked and contributed to Medicare through payroll deductions for approximately ten years, which is equivalent to 40 quarter-years.
Parts B and D. These components cover doctor visits and prescription medications, respectively. Most recipients are required to pay a monthly premium for Part B and (if enrolled) Part D, regardless of their retirement income.
Higher-income beneficiaries face increased costs for this coverage. The premium calculation is based on your tax return from two years prior. For example, your income from 2023 will determine your premiums in 2025. Consequently, if you recently retired, the government will use your pre-retirement income to set your premiums.
If your modified adjusted gross income (MAGI) surpassed $106,000 (for single filers) or $212,000 (for married couples filing jointly) on that reference tax return, you will incur higher premiums for Parts B and D.
How much more might you owe? For instance, a couple with a MAGI between $266,000 and $334,000 in 2023 would be subject to surcharges, known as IRMAAs (Income-Related Monthly Adjustment Amounts), which could total around $220 monthly, on top of the standard premium of $185. This means each spouse could pay approximately $400 monthly in premiums.
In most cases, retirees experience a drop in income, even if they continue working part-time. Unfortunately, the government does not automatically adjust your Medicare premiums should your income decrease. In such situations, it’s necessary to file with the Social Security Administration using an SSA-44 form to request a recalculation of your surcharges based on your new, reduced retirement income.
What impact might your retirement earnings have on your newly recalculated Medicare premium? Likely, very little. The only exception could arise if your combined earnings from work and other retirement income push you over the thresholds that trigger surcharges.
How Working in Retirement Affects Your Social Security Benefits
According to estimates from the Social Security Administration, over half of families — specifically 57% — who receive Social Security benefits find themselves paying federal income tax on some portion of those benefits.
Taxation on Social Security benefits is more complex than taxation on regular income. The percentage of your Social Security payments that are subject to tax depends on your total combined income. This figure, often referred to as provisional income, is calculated by the I.R.S. by summing your adjusted gross income (AGI) — which typically includes earnings from employment or investments — plus interest from tax-exempt bonds, and half of your Social Security benefits.
This provisional income is then used to determine your income thresholds for tax obligations. Here are the income thresholds and the corresponding proportion of benefits that are taxable:
- Single filers: If your combined income is less than $25,000, none of your benefits are taxable. If your income is between $25,000 and $34,000, up to 50% of benefits may be taxable. Above $34,000, 85% of benefits are taxable.
- Married filing jointly: For couples with a combined income of less than $32,000, no benefits are taxable. If income is between $32,000 and $44,000, up to 50% of benefits may be taxable. Above $44,000, 85% of benefits are taxable.
What does the taxation of your Social Security benefits mean for how your earned income is taxed in retirement? For many retirees with middle to higher incomes, a portion of their Social Security benefits will be taxable based on long-established thresholds. Earnings from post-retirement work contribute to these limits and could, in theory, increase the taxable portion of your benefits.
However, in practice, unless your income from non-work sources is exceptionally low, it is unlikely that working earnings alone would push you over a tax threshold for Social Security, thereby increasing the amount of benefits subject to taxation. Most retirees will find that working part-time during retirement does not significantly alter the taxable nature of their Social Security benefits.
Key Factors Influencing Taxation on Your Retirement Income
Several additional factors can influence the taxation of your retirement income.
One immediate factor affecting Social Security taxes relates to your state of residence. Nine states impose their own taxes on some Social Security benefits: Colorado, Connecticut, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont, and West Virginia. If you live in one of these states, you may face state taxes on a portion of your Social Security income. However, many of these jurisdictions provide deductions or phase-outs that minimize the tax burden for residents. It is advisable to review your state’s regulations.
Another recent legislative development has the potential to eliminate federal taxation on Social Security benefits entirely. Proposed legislation this year by Democrats in both the House and Senate aims to achieve this goal. Whether these bills will pass remains uncertain.
During the 2024 campaign, President Donald Trump frequently pledged to end the taxation of Social Security benefits. Although he has yet to implement such a ban, the Republicans’ recently passed comprehensive bill includes a new deduction for seniors, designed to alleviate some of the tax burdens associated with Social Security benefits.
Adults aged 65 and older can claim an additional deduction of up to $6,000. This full amount is available to individual taxpayers with modified adjusted gross incomes of up to $75,000, or married couples with incomes up to $150,000. The deduction will gradually phase out for taxpayers exceeding these income thresholds.
This temporary deduction is applicable for tax years 2025 through 2028 and will be available to qualifying taxpayers whether they opt for the standard deduction or choose to itemize their deductions.
Essential Takeaways on Working in Retirement and Financial Planning
For many individuals, the income derived from employment during retirement may not affect the net federal benefits received. However, because work earnings will elevate your combined income, your overall tax obligations could increase.
As you navigate retirement, it is essential to consider effective financial strategies to minimize your tax liabilities. Monitor your total income from wages, withdrawals from retirement accounts, and investment income. You may want to explore strategies that could lower your taxes, including taking advantage of the new senior deduction that may become available starting with your 2025 tax return.
Lastly, seeking professional assistance can be invaluable in managing work income during retirement, particularly for high earners. The implications of these earnings can become intricate and challenging. A qualified financial planner can provide guidance to address your inquiries and help manage your retirement portfolio effectively.
