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Navigating Social Security While Working: Essential Insights for Harvard Employees

65 is the new 55 when it comes to retirement from your Harvard firm, meaning you may have the option to work at the same time you claim Social Security benefits. If you retire from Harvard and get a part-time job or some consulting income, your paycheck can affect the amount you receive monthly, the amount you owe in taxes for the year, and your Medicare premiums.

Reasons abound to keep working, but for most, it simply comes down to math and to emotions.

With a longer lifespan on average, many of our clients from Harvard are concerned they won't have enough savings to last their lifetime, and understandably so.

If you plan to keep working after retiring from your Harvard while collecting Social Security, here is what you need to keep in mind:

Timing Matters

If you start your Social Security benefits before your (FRA), or full retirement age (which is between 66 and 67, depending on the year you were born), you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your full retirement age(FRA). ¹

There will also be an earnings test until you reach that full retirement age(FRA): If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.

The year you reach your full retirement age(FRA), the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.

These reduced benefits do not just 'disappear'. If your benefits have been reduced due to earnings, your monthly Social Security check will be increased after your full retirement age(FRA) to account for benefits withheld earlier due to excess earnings.

Note: Earned Income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of 'unearned' income.

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'Earned Income' includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they're all based upon employment. Once you reach your full retirement age(FRA), there is no earnings test and no benefit reductions based on earned income.

Scenarios: Claiming Social Security at 62 while working

This hypothetical example is calculated by Fidelity Financial Solutions Team, using Social Security and tax tools. The tools are based on data and methodology published by the Social Security Administration (as of March 2022) and Internal Revenue Service (as of March 2022). All benefits are calculated in today’s dollar.(See: Income Taxes And Your Social Security Benefit for more information.). The actual benefit would be adjusted for inflation. State/Local taxes are not considered. All the numbers are rounded to the closest $500. Example assumes an individual turning 62 in 2022, makes $100K/year before retirement, $65K/year expenses in retirement, receives $24K/year Social Security benefits at age 62, single tax filing status, and standard deduction for federal tax purpose. Any additional income needs are covered by withdrawals from tax deferred account, therefore are fully taxable.

Tax Impacts

Separate from the earnings test, Social Security benefits themselves are subject to federal income taxes above certain levels of 'combined income.' Combined income generally consists of your adjusted gross income (AGI), ² nontaxable interest, and one-half of your Social Security benefits.

For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See: Income Taxes And Your Social Security Benefit for more information.)
For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.

Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.

Additionally, 11 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if you're one of our Harvard clients that this applies. ³

State Social Security Tax

The eleven states below impose a tax on Social Security benefits to varying degrees.

Colorado

Colorado's pension-subtraction system exempts up to $24,000 in pension and annuity income, including some Social Security benefits. The exemption is based on your age, starting at age 55.

Connecticut

Connecticut partially or fully exempts Social Security benefits, based on a person's filing status and income.

Kansas

Kansas exempts Social Security benefits from state tax, based on the taxpayer's income. Your Social Security benefits are exempt from Kansas income tax if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status.

Minnesota

Minnesota partially taxes Social Security benefits. The state allows a subtraction from benefits ranging from $2,725 for married taxpayers who file separately, to $4,260 for single taxpayers, to $5,450 for married taxpayers who file jointly. The rule is subject to phaseouts starting at incomes of $82,770 for joint married filers, $41,385 for married taxpayers filing separately, and $64,670 for heads of household and single filers. The subtraction is less for these incomes and eventually phases out entirely as you earn more.

Missouri

Missouri exempts Social Security benefits from state tax, provided that the individual is age 62 or older and has adjusted gross income of less than $100,000 if married and filing jointly, or $85,000 for all other filing statuses. Those who earn more than that might qualify for the exemption if they're disabled.

Montana

Montana asks residents to use the Montana Individual Income Tax Return to determine the portion of Social Security benefits that's taxable by the state (page 5 and page 6). That might be different from the federal amount.

Nebraska

Starting in 2022, Nebraska began phasing out taxation of social security benefits. The state allows a deduction for Social Security income that's included in your federal adjusted gross income if your federal Adjusted Gross Income(AGI) is less than or equal to $61,760 for married couples filing jointly, or $45,790 for all other filers.

New Mexico

Starting in 2022, the state of New Mexico changed rules that would exempt most seniors from paying tax on social security benefits. This exemption is available to taxpayers with the following income thresholds — $100,000 for single filers, $150,000 for married filers filing jointly, and $75,000 for married filers filing separately.

Rhode Island

Rhode Island has an exemption on Social Security taxation for those who have reached full retirement age as defined by the IRS. Eligible taxpayers must have federal Adjusted Gross Income(AGI)s of $88,950 if single, or $111,200 if married and filing jointly.

Utah

In late 2019, Utah adopted a sweeping tax bill that includes a tax credit for Social Security benefits that are included in a taxpayer's federal adjusted gross income. The Adjusted Gross Income(AGI) thresholds are $25,000 for married filing separately, $50,000 for married filing jointly, and $30,000 for single filers.

Vermont

Vermont previously followed the federal rules for determining the taxable portion of Social Security benefits, and then it adopted exemptions for taxpayers with incomes below $25,000 for single filers and $32,000 for other statuses. Benefits for those with higher incomes are taxed at incremental levels, with no exemption available for Adjusted Gross Income(AGI) of over $55,000 if single or over $70,000 if you're married and file jointly.

Medicare & Social Security

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.

These earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

If you are making much less in retirement than before, could it hurt your benefits?

No. This is because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.

Note: Your earnings may not only push you into a higher tax bracket, but also into a higher threshold for your Medicare premiums once you are over 65. Medicare sets the cost (premium) for Part B each year at a fixed rate for most participants ($170.10 a month for 2022), but it increases for individuals with an annual income over $91,000 and married couples with an annual income above $182,000. The cost for these higher-earning participants can range from $238.10 to $578.30 per month in 2022.

If your income is above a certain level, you may have to pay IRMAA (Income-Related Monthly Adjusted Amount) in addition to your Part B or Part D premium. We recommend you consult with a tax professional for more details on whether or not you are affected.

Can I Contribute to a Retirement Account?

Another key advantage of ongoing earned income even after you collect Social Security is that you can keep contributing to your retirement savings accounts like traditional IRAs, health savings accounts (HSAs), Roth IRAs, and 401(k)s.

Note: If you are over 72, you will have to take the required minimum distribution (RMD) from your traditional IRA, except for during the 2020 pause because of COVID-19.

Your traditional 401(k), or similar Harvard retirement plan, is a different story. In general, you can continue stashing away money in your current Harvard-provided plan as long as you're still working, even part-time, and you can delay taking your RMD until after you retire.

These additional savings can help, especially if your savings are running a bit behind your goals. The combination of the added savings, tax-deferred growth potential, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.

What are the key distribution options available to employees at Harvard University upon retirement, and how do these options differ regarding tax implications? Employees should understand both the annuity options and lump-sum distributions available under the Harvard University Retirement Plan, as these can significantly affect their financial outcomes in retirement. Harvard University provides various choices depending on the lump-sum value, and it's essential to analyze each choice carefully to maximize retirement benefits.

Key Distribution Options: Upon retirement, Harvard University employees can choose between a lump-sum distribution, a rollover to another retirement account, or an annuity with different options, including a single-life annuity or joint and survivor annuity(Harvard University Reti…). Lump-sum payments may lead to immediate tax liabilities, while annuity options offer more tax-deferred growth(Harvard University Reti…).

How does the choice of an annuity payment method impact the long-term financial security of retirees at Harvard University? Employees need to weigh the advantages and disadvantages of single life versus joint and survivor annuities, considering not only their own financial needs but also those of potential beneficiaries. The decision can affect monthly income levels and the benefits passed on to surviving partners or dependents.

Impact of Annuity Payment Method: Choosing a single-life annuity maximizes monthly payments but provides no benefits after the retiree’s death. A joint and survivor annuity reduces monthly payments but ensures ongoing income for a surviving spouse or beneficiary, offering more long-term financial security for both parties(Harvard University Reti…).

What specific conditions must be met for a retired employee of Harvard University to elect the Consolidated Harvard Annuity Option (CHAO), and what benefits might this offer? Understanding the eligibility criteria for CHAO and its implications on retirement planning will help employees make informed decisions. The CHAO allows for a potential increase in annuity benefits, but there are specific deadlines and requirements that participants must adhere to.

Consolidated Harvard Annuity Option (CHAO): To elect the CHAO, employees must terminate their employment after April 30, 2006, and have a Basic Retirement Account balance exceeding $1,000. They must elect the CHAO within 60 days of termination to exchange their investment account for a higher annuity(Harvard University Reti…)(Harvard University Reti…).

How can employees at Harvard University ensure that they have properly designated beneficiaries within their retirement plans, and what are the ramifications of failing to do so? The importance of keeping beneficiary designations up to date cannot be overstated, as it impacts how benefits are distributed upon the participantâ€™s death. Employees must familiarize themselves with the required forms and the potential consequences of having outdated or incorrect designations.

Beneficiary Designations: Employees should ensure their beneficiary designations are up to date by completing the appropriate forms. Failure to do so could result in benefits being distributed according to marital status or to unintended recipients(Harvard University Reti…).

In what ways do the spousal consent rules affect the retirement options for married employees of Harvard University, and why is this a critical aspect to consider when planning for retirement? Understanding the spousal consent requirements is vital for retirees since failing to adhere to these regulations can lead to unintended consequences, including issues related to benefit disbursement. Employees should seek to navigate these requirements carefully to secure their desired benefit structure.

Spousal Consent Rules: Married employees must obtain spousal consent, witnessed by a notary or plan representative, if they choose a retirement distribution option that does not provide survivor benefits to their spouse(Harvard University Reti…). Failure to adhere to these rules can result in complications with benefit disbursement(Harvard University Reti…).

How does the $1,000 threshold affect retirement distribution choices for employees retiring from Harvard University, and what specific options are available once this threshold is considered? Employees need to be informed about the options that arise based on the value of their Basic Retirement Account when making distribution decisions. Knowing whether an annuity or lump-sum option is available can significantly influence retirement planning and benefits.

$1,000 Threshold: If an employee's Basic Retirement Account value is $1,000 or less, they must take a lump-sum payment or rollover, as annuity options are unavailable. The lump-sum is subject to tax withholding unless rolled over(Harvard University Reti…).

What steps should employees at Harvard University take if they wish to defer their retirement distributions, and what factors should they consider before making this decision? Deferring distributions can offer various tax advantages and impact retirement income strategies. Employees should evaluate their financial situations, anticipate future needs, and understand the timelines involved in the deferment process to make sound choices.

Deferring Distributions: Employees can defer their distributions until the April 1st following the year they turn 70½. Deferring can offer tax advantages and allow time for the value of retirement funds to grow(Harvard University Reti…).

What are the consequences of electing a lump-sum distribution from a retirement account at Harvard University, particularly in terms of immediate and long-term tax implications? Employees considering a lump-sum distribution must recognize that such options can lead to significant tax liabilities and potential penalties, especially if improperly managed. A thorough understanding of these financial repercussions can aid in making choices that align with retirement goals.

Lump-Sum Distribution Consequences: Opting for a lump-sum distribution can result in substantial tax liabilities, including early withdrawal penalties if under age 59½. However, rolling the distribution into another retirement account can mitigate tax impacts(Harvard University Reti…).

How can employees contact the Harvard University Retirement Center to learn more about their retirement plan options, and what information should they prepare before reaching out? Understanding how to access information and ask the right questions is crucial for employees looking to navigate their retirement options effectively. Having personal details and specific inquiries ready when contacting the Harvard University Retirement Center will facilitate a more productive dialogue.

Contacting the Retirement Center: Employees can reach the Harvard University Retirement Center at 800-527-1398 for information. They should have their pension statement, retirement account details, and any specific questions prepared(Harvard University Reti…).

What should employees at Harvard University consider when choosing whether to roll over their retirement benefits into another employer's retirement plan or an IRA? The decision to roll over retirement benefits comes with various implications, including investment choices, fees, and the overall management of retirement funds. An in-depth understanding of the pros and cons of rollover options will empower employees to make informed decisions that best suit their financial futures.

Rollover Options: Rolling over retirement benefits into another employer’s plan or an IRA allows employees to maintain tax-deferred growth. It is crucial to compare fees, investment options, and withdrawal rules before making a decision(Harvard University Reti…).