Can You Retire and Still Work? Rules and Considerations

Continuing to work during retirement has become a common path for many, driven by financial considerations or a desire to remain engaged. This approach allows for a blend of continued income generation and personal interests, redefining the traditional concept of retirement. Understanding the financial intricacies, especially concerning income sources and tax obligations, is important for this flexible transition.

Social Security Benefits and Working

Earning income while receiving Social Security benefits can impact the amount of benefits received, depending on an individual’s age relative to their Full Retirement Age (FRA). The Social Security Administration (SSA) applies an earnings test for beneficiaries who have not yet reached their FRA. This test reduces benefits if earnings exceed specific annual limits.

For individuals under their full retirement age for the entire year, the earnings limit for 2025 is $23,400. If earnings surpass this threshold, the SSA deducts $1 in benefits for every $2 earned above the limit.

A different earnings limit applies in the year an individual reaches their full retirement age. For 2025, this limit is $62,160, applying only to earnings accumulated before the month the individual attains their FRA. The SSA deducts $1 in benefits for every $3 earned over this higher limit. Once an individual reaches their full retirement age, the earnings test no longer applies, and there is no limit on how much can be earned without affecting Social Security benefits. Benefits withheld due to exceeding these limits are not permanently lost; they are added back to future payments as increased monthly benefits once the individual reaches their full retirement age.

Beyond the earnings test, earned income can also affect the taxability of Social Security benefits. The Internal Revenue Service (IRS) uses a calculation called “provisional income” to determine if a portion of Social Security benefits is subject to federal income tax. Provisional income is generally calculated as your adjusted gross income, plus any tax-exempt interest, plus half of your Social Security benefits.

For single filers in 2025: if provisional income is below $25,000, no benefits are taxable. Between $25,000 and $34,000, up to 50% may be taxable. Above $34,000, up to 85% may be taxable. Married couples filing jointly have different thresholds for 2025: if their provisional income is below $32,000, no benefits are taxable. Between $32,000 and $44,000, up to 50% may be taxable, and above $44,000, up to 85% may be taxable.

Impact on Other Retirement Income Sources

Working in retirement can also influence other types of retirement income, such as pensions and distributions from tax-advantaged accounts like 401(k)s and IRAs. The specific impact often depends on the rules of the particular plan and the individual’s age.

For private and public pension plans, rules regarding continued employment vary. Some plans may affect benefit payments if a retiree returns to work for the same employer or within the same system. Review plan documents or consult administrators for limitations. Working for a new, unrelated employer generally does not affect pension payments.

Distributions from IRAs and 401(k) plans are subject to age-related rules. Withdrawals from traditional IRAs and 401(k)s can be made without a 10% early withdrawal penalty once the account holder reaches age 59½. Before this age, withdrawals are subject to income tax and a 10% penalty, unless an IRS exception applies. Exceptions include qualified higher education expenses, certain medical expenses, or a first-time home purchase up to $10,000.

A distinct rule known as the “Rule of 55” allows individuals who separate from service with an employer in or after the year they turn age 55 to take penalty-free withdrawals from that employer’s 401(k) plan. While the 10% penalty is waived, these distributions are still subject to ordinary income tax. This rule applies only to the 401(k) plan of the employer from whom the individual separated, not to IRAs or 401(k)s from previous employers.

Required Minimum Distributions (RMDs) begin at age 73 for traditional retirement accounts, including 401(k)s and IRAs. However, a “still working” exception applies to 401(k) plans. If an individual is still employed past age 73 and is not a 5% owner of the company, they can delay RMDs from their current employer’s 401(k) plan until April 1 of the year following their retirement. This exception does not apply to IRAs or 401(k)s held with former employers.

Roth accounts, both IRAs and 401(k)s, have different distribution rules due to their after-tax contributions. Contributions to a Roth IRA can be withdrawn tax-free and penalty-free at any time, regardless of age. Earnings from a Roth IRA or Roth 401(k) are also tax-free and penalty-free if the account has been open for at least five years and the account holder is age 59½ or meets another qualifying condition. Unlike traditional accounts, Roth IRAs do not have RMDs during the original owner’s lifetime.

Tax Considerations for Working Retirees

Earning income in retirement introduces additional tax considerations. Wages from employment or net earnings from self-employment are generally subject to federal, state (where applicable), and local income tax. This income is added to other taxable sources, potentially placing the individual in a higher tax bracket.

Individuals working as independent contractors or freelancers in retirement are subject to self-employment tax. For 2025, the rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). This tax applies to 92.35% of net earnings from self-employment.

The Social Security portion is capped at $176,100 for 2025. The Medicare portion has no earnings cap, applying to all net self-employment income. An extra 0.9% Medicare tax may apply to earnings exceeding $200,000 (single) or $250,000 (married filing jointly). Self-employed individuals can deduct one-half of their self-employment tax when calculating adjusted gross income.

The addition of earned income affects eligibility for certain tax deductions, credits, or other income-based benefits. Increased income might reduce itemized deductions or alter phase-out thresholds for tax credits. Understanding how earned income interacts with existing tax laws is important for financial planning.