Working in Retirement: How Does It Affect Your Savings and RMDs?

Working after retirement can raise financial questions. First, earning a salary after you've registered for government programs, such as Social Security and Medicare, can affect your taxes and maybe even lead to a temporary reduction in your benefits. And there are additional rules governing the way you use the money in your tax-advantaged retirement savings.

None of this should be taken as a reason not to work if you want to do it. But it is important that you understand how the rules could affect you if you get back on the job. Here are some key questions to ask.

In most cases, under current law, you should be able to contribute to your employer's qualified retirement plan regardless of your age. If you meet relevant income limits,¹ you can also contribute to a traditional IRA or Roth IRA if you have earned income.

Whether the IRA contribution is tax deductible depends on your income and whether you're also an active participant in an employer-provided retirement plan.

Working in retirement doesn't affect RMDs from IRAs. If you've reached age 73, you'll have to take them from a traditional IRA. There are no RMD requirements for a Roth IRA.

The rules for qualified employer plans, such as 401(k)s, are different. If you continue to work past age 73 and do not own more than 5% of the business you work for, most plans allow you to postpone RMDs from your current—but not a prior—employer's plan until no later than April 1 of the year after you finally stop working. If you have a 401(k) from a prior employer, you may still be subject to the RMD requirement. Check with your plan administrator for both your new and prior employers.

For details, please see the IRS topic "Retirement Plan and IRA Required Minimum Distributions FAQs."

Generally, no. Having additional income from a job should work with your existing allocation, assuming it's appropriately geared toward accomplishing your goals. If your main goal is having enough to cover your spending in retirement, we generally recommend a stock allocation of at least 20% (conservative) but no more than 60% (moderate). Depending on your age, time horizon, and spending needs, such a portfolio should stand a pretty good chance of lasting for your lifetime.

How much you've already saved is another issue. If you currently have more than you need to cover your spending in retirement, you can be a little more flexible with your stock allocation. Again, this will depend on your personal circumstances, time horizon, spending relative to the size of your portfolio, and risk tolerance.

The rules vary, depending on the plan, so check with your pension plan provider and the human resources department at your new employer to see if returning to work will affect your benefits or pension payments. This is especially important if you return to work for a former employer.

Working in retirement can help you earn extra money to cover your day-to-day expenses and keep you active and engaged. Just be aware that you may also need to make a few small adjustments to your retirement plans. Don't hesitate to get help from a financial planner and tax professional with the more complex tax and retirement benefit implications.