Delayed Retirement Considerations – Part 2

IRAs

The longer you delay retirement, the longer you can contribute to your IRAs, up to a point. If you have a traditional IRA, you have to start taking required minimum distributions (and stop contributing) once you reach age 70½. If you fail to take the minimum distribution, the IRS will assess a 50 percent penalty on the amount that should have been distributed. If you have money in your current employer's retirement plan, as long as you are not a more than five percent owner, the required minimum distribution rules do not apply until you reach age 70½ or retire, whichever occurs later. If you have a Roth IRA, you don't have to take withdrawals at any age, and you can continue to make contributions after age 70½ (if you have earned income).

Employer-sponsored pension plans

If you continue to work past your normal retirement date for the same employer (or if you retire and then return to work for that employer), and you participate in a traditional (defined benefit) pension plan, you need to understand how your pension benefit will be impacted by your delayed retirement.

Some plans will allow you to start receiving your pension benefit once you reach the plan's normal retirement age, even if you continue to work. Other plans will suspend your pension benefit if you work beyond your normal retirement date, but will actuarially increase your payment when benefits resume to account for the period of time benefits were suspended. Still other plans will suspend your benefit for any month you work more than 40 hours, and will not provide any actuarial increase--in effect, you'll forfeit your benefit for any month you work more than 40 hours.

Some plans provide yet another option--"phased retirement." This type of program allows you to continue to work on a part-time basis while accessing all or part of your pension benefit. Federal law encourages these phased retirement programs by allowing pension plans to start paying benefits once you reach age 62, even if you're still working and haven't yet reached the plan's normal retirement age.

401(k) and other employer-sponsored retirement plans

If you participate in a 401(k), profit-sharing, ESOP, 403(b), 457(b) or similar plan sponsored by your employer, you'll be able to continue to contribute to the plan, and receive any applicable employer contribution, if you continue to work beyond your plan's normal retirement age.

Whether you'll be able to access your funds while you're employed depends on the terms of the plan. Some plans allow you to take distributions once you turn age 59½, or once you reach normal retirement age, or if you experience a hardship. Other plans require that you terminate employment before you're eligible to receive a distribution. Check with your plan administrator to find out your plan's distribution options if you think you may need to access your funds while you're still employed. Your distribution options will also be spelled out in your plan's summary plan description (SPD).

If you continue working past age 70½, you won't need to begin taking required minimum distributions (RMDs) from your plan until April 1 of the calendar year following the calendar year in which you retire (if the retirement plan allows this and you own five percent or less of the company).

Health benefits

Many individuals work during retirement to keep their medical coverage. If working during retirement for you means moving from full-time to part-time, it's important that you fully understand how that decision will impact your medical benefits.

Some employers, especially those with phased retirement programs, offer medical coverage to part-time employees. But other employers don't, or require that you work a minimum number of hours to be eligible for benefits. If your employer doesn't offer medical benefits to part-time employees, you'll need to look for coverage elsewhere. If you're married, the obvious option is coverage under your spouse's health plan, if your spouse works and has coverage available. If not, you may be eligible for COBRA coverage.

COBRA is a federal law that allows you to continue receiving medical benefits under your employer's plan for some period of time, usually 18 months, after a qualifying event (including loss of coverage due to a reduction in hours). But it's expensive--you typically have to pay the full premium yourself, plus a two percent administrative fee. (COBRA doesn't apply to employers who have fewer than 20 employees.) Another option is private health insurance, but that will likely be very expensive.

Of course, once you turn 65, you'll be eligible for Medicare. You'll want to contact the Social Security Administration approximately three months before your 65th birthday to discuss your options. If you have private or employer-sponsored health insurance, talk to your benefits administrator or insurance representative before enrolling in Medicare to find out how your current health insurance fits in with Medicare.

Article courtesy of Forefield.Securities offered through NPB Financial Group, LLC.

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