How to navigate benefits if you’re working past age 65

It’s no secret that Americans are working longer. But some are working well past traditional retirement age: the fastest-growing segment of the labor force is workers over age 65, according to the U.S. Bureau of Labor Statistics – and the growth is especially pronounced among workers over age 70.

Working longer certainly can boost the odds of a successful retirement plan via higher Social Security income, retirement account contributions and fewer total years of dependence on portfolio accumulations.

But working well past traditional retirement age does present some complications. Much of our retirement benefits structure still is geared toward a more traditional retirement age. The Medicare enrollment age is 65; Social Security’s full retirement age (FRA) is 66, on its way to 67 in 2027. Required Minimum Distributions (RMDs) must begin at age 70 ½. And the tax-deferred retirement system is predicated on the idea that older people will be in lower tax brackets when funds are withdrawn than during the traditional wealth accumulation years.

Here are some key retirement planning items to keep in mind.

Social Security

Working longer is a great way to get the most out of Social Security. Benefits are calculated using a formula called the primary insurance amount, or PIA. Seniors who wait to start receiving Social Security until their full retirement age (currently 66) receive 100 percent of PIA; taking benefits at 62, the first year of eligibility, gets them only 75 percent of PIA. By waiting until age 70, they’ll receive 132 percent of the PIA – nearly double the monthly income for the rest of their lives. Those benefits are enhanced by an annual cost-of-living adjustment, which is added in for years of delayed filing.

For people working in their 60s, there’s very little sense in filing early – unless you have reason to think your life expectancy will be unusually short. Earlier filers who have income from work in 2013 of more than $15,120are hit with a penalty (Social Security defines “income” in this context as wages from employment or net earnings from self-employment). If earnings exceed the limit, $1 will be deducted from benefit payments for every $2 earned over that amount. The withheld benefits are added back into benefits after you reach full retirement age. After that age, they can have unlimited income and receive Social Security benefits without penalty. For 2014, the earnings test limit is $15,480.

Likewise, there’s no reason to wait beyond age 70, even for people who are still working, since credits stop accruing at that age. However, it’s important to keep an eye on taxation of Social Security. Benefits are taxed using a “combined income” formula that is determined by adding together adjusted gross income, tax-exempt income and half of the Social Security benefit. If that total exceeds $25,000 for individuals ($32,000 for married couples), then 50 percent if the excess must be included in income for tax purposes; if it’s over $34,000 ($44,000 for couples) then 85 percent of the excess is included in your income. 

Medicare

Medicare filing errors can be costly.

Eligibility begins at 65, and sign-up is automatic if you already receive Social Security benefits. If not, it’s important to sign up sometime in the three months before your 65th birthday up through the three months following, because failing to do so can lead to expensive premium penalties down the road. (Although signup can be done up until three months after the 65th birthday, but there’s a waiting period for people who don’t enroll by the end of the month that they turn 65.)

Monthly Part B premiums jump 10 percent for each full 12-month period that a senior could have had coverage but didn’t sign up. That can really add up: a senior who fails to enroll for five years ultimately would face a 50 percent Part B penalty–10 percent for each year. Penalties also are applied to Medicare Part D (prescription drugs) and Medicare Advantage plans (Part C) that include drug coverage.

Planning to work past age 70? You can delay starting Medicare without penalty if you’re insured based on her active work status by an employer with more than 20 employees. In those situations, the employer’s health coverage is primary, so she could postpone filing for Parts A (hospitalization) or B (outpatient services), though many choose to enroll for Part A anyway because it doesn’t require premium payments. Seniors can enroll in Part B later on without penalty for up to eight months following loss of group health coverage.

Some experts advise signing up for Part A at age 65 even for people who continue to work, since there is no premium. One caveat to consider:people enrolled in a health saving account (HSA) should proceed with caution because they cannot make HSA contributions once they are enrolled in Medicare.

If you are already receiving a Social Security benefit you will be automatically enrolled in Medicare Part A and Part B. If you want do opt to postpone enrollment, it’s wise to notify Medicare at age 65 of your decision in order to ensure that there won’t be problems with premium penalties at a later time. This can be done by checking off a box on the back of a Medicare card that has been sent, by calling the Social Security Administration, or by going to the SSA website.

If your employer has fewer than 20 workers, or you are self-employed, sign up for Medicare at 65.

RMDs

Required Minimum Distributions (RMDs) must be taken from Individual Retirement Accounts (IRAs) starting in the year you turn 70.5 – and from 401(k)s at the same age, unless she is working for the employer that sponsors the plan.

For older people who are still working at this age, RMDs are just one of several moving parts in the income picture, along with wages, Social Security, interest income and a traditional pension from a former employer, if any. The top marginal rate is now 39.6 percent for individuals next year with income over $406,750 and joint filers over $457,600.

Working seniors also may find themselves paying Medicare’s high income premium surcharges. The surcharges are applied to Part B, Part D (prescription drugs). They affect individuals with more than $85,000 in annual income and joint filers with total annual income of more than $170,000. The surcharges start at $42 per month, and run up to $231 monthly for the highest income seniors.

One plus for working seniors is that RMDs don’t have to be taken from the 401(k) of a current employer. Am RMD must be taken from each of any older 401(k)s at former workplaces, and one way to minimize RMD obligations is to roll over those accounts to the current 401(k). Consolidation also brings simplicity – you’ll only have one plan to deal with, fewer statements and easier asset allocation decisions.

Other options for minimizing RMDs are few. One that is available – at least for 2013 – is the qualified charitable distribution (QCD), which lets you make cash donations up to $100,000 to IRS-approved public charities direct from an IRA. (QDCs from workplace plans aren’t allowed.) The gifts can be counted toward an RMD and are excluded from taxable income.

This tax shelter has been on the congressional chopping block for some time and isn’t expected to be extended for 2014.