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For various reasons, many people continue to work while collecting Social Security retirement benefits. Some people need the additional income while others simply enjoy keeping busy. Per the Social Security Administration, SS benefits represent about 30% of the income of people over age 65. Whatever the reason, there are important tax implications to consider should you choose to work while receiving Social Security benefits.
You can start collecting Social Security retirement benefits at age 62, but full retirement age is between 65 and 67, depending on your birth year. People age 65 and younger who work while collecting Social Security will have their benefits reduced by $1 for every $2 they earn over $21,240 in 2023.
If you reach full retirement age in 2023, your benefits will be reduced by $1 for every $3 you earn over $56,520 in the months before you reach full retirement age (depending again on your birth year). For these purposes, earnings include gross wages from a job, or net earnings if you are self-employed. It does not include pensions, annuities, investment income or other retirement benefits. Starting with the month you reach full retirement age, your benefits will not be reduced no matter how much you earn.
Keep in mind that the amount of the benefit that is reduced while you are working is not gone forever. Once you reach full retirement age, it will be returned to you over time in the form of a slight increase in your monthly benefits.
Your earnings in retirement also affect the amount of benefits subject to income tax. If your “combined income” (including adjusted gross income, tax-exempt interest and half of your Social Security benefits) exceeds $25,000 as an individual or $32,000 for a married couple filing jointly, you may have to pay federal income taxes on as much as 85% of your benefits.
Imagine what your ideal retirement looks like. Do you see yourself spending a lot of time at the golf course? Volunteering? Babysitting your grandchildren? Or, maybe you’d prefer to continue working because it energizes you and gives you purpose. Ultimately, the decision is up to you. If you need any assistance, we’re here to help. Please contact us if you have any questions about Social Security benefits or retirement.
It’s awkward. And complicated. And emotional. But dealing with what happens to your estate after your death is an unavoidable and essential task. Like many people, you may have consulted an estate attorney to create a trust and will, ensuring that assets pass along to selected family, friends or institutions. However, like many people, you may not realize there is another step to take. A step that, if missed, could mean your wishes are not followed or your beneficiaries pay more taxes or wait longer to have access to their inheritance.
That is, regardless of who is named on your will and trust, those wishes have no bearing on accounts that have a different beneficiary designated.
As an example, imagine that your uncle goes through a terrible divorce but then meets the woman of his dreams and gets remarried. Being a responsible person, Uncle Charles revises his will and trust naming his new wife as his beneficiary. However, he neglects to update his beneficiary designation on his life insurance policy and his IRAs. When he passes away unexpectedly, his insurance and IRA benefits are paid out to his ex-wife while his new wife receives nothing, even though she’s listed in the will and trust.
As another example, let’s say that you and your spouse created a will and trust that equally distributes your $5 million insurance policy among your four children. However, unfortunately, you had not updated the policy beneficiary designations between the births of your second and third children, listing only the older two by name. Since the beneficiary designation on the account takes precedence over the will and trust, only your oldest two children would receive any inheritance from the policy. The younger two children would receive nothing, which would likely create conflict and drama at an already emotional time.
What if there is no beneficiary listed on an account?
If there is no beneficiary designation on an account, the will or trust will be consulted. However, if there is no beneficiary designation and no will or trust, a court determines your beneficiaries for you.
Even if you have a will or trust to turn to in the case that an account has no beneficiary designated, there can be tax implications for the heir. For example, some accounts must be paid out within five years of death, like annuities, qualified plans and IRAs. A named beneficiary can rollover to a qualified plan or stretch out their withdrawals from the IRA over the rest of their lives, deferring their income taxes. If the beneficiary is named by the will or trust or determined by a court, the funds must be drawn out during a five-year period or possibly even taken out as a lump sum distribution, both of which would be taxed at a much higher tax rate than funds rolled into a qualified plan.
What should you do next?
First, review your estate plan and ownership of your assets. Consider whether your trust should be the beneficiary rather than specific people’s names. Listing your trust has two main benefits:
For example, let’s say you have a $2 million qualified plan that you are leaving to your son. To be fair, you leave the rest of your estate, also worth two million dollars, to your daughter. You feel that you’ve balanced the inheritance perfectly and that both your children will receive equal shares. However, because your son is named, he can take the assets out of the account throughout his life, paying a much lower tax rate. While your daughter, unfortunately, may be required to pay the entire inheritance tax, which is at a much higher rate. While you intended to be fair, tax implications of the various kinds of inheritance leave your son with a much larger amount than your daughter. Naming your trust as the beneficiary and then designating inheritance within the trust will allow you to achieve the balance you desire.
Second, check the following list of accounts to be sure your designated beneficiaries are up to date:
When should you update your beneficiaries?
Some experts suggest checking your beneficiaries annually; others suggest every three to five years. One easy way to remember which accounts to check is to gather the 1099 tax forms from the financial institutions holding your assets, which you should receive in February of each year.
You should also update your beneficiaries any time there is a major change in your life, including:
How do you check who is listed as your beneficiaries?
Simply call your financial institution or see if you can access the information through your online account. Typically, the only information you need to provide about your beneficiary is their name and address, although sometimes a social security number is also required.
While thinking about what happens to your assets after your death can feel overwhelming, awkward and emotional, taking the time to update your beneficiaries prevents animosity and expense for your beneficiaries after your death. If you have any questions about trusts, wills or beneficiary designations, contact us today.
