When Working Longer Means Paying More in Taxes

Many of my clients are incredibly passionate about their work.

They’ve been working their whole adult lives to build something important and have made many meaningful connections along the way.

This passion means that you might be working because you want to, not because you have to.

There is a sense of purpose or drive in your day.

Just recently, one of my clients mentioned that “retirement feels less like a reward and more like a loss” to him (this is a separate story for another day).

However, from a tax perspective, the IRS views your dedication quite differently.

Once you cross a certain income point or age threshold, such as the Required Minimum Distribution (RMD) age of 73, the math of staying employed changes significantly.

Here are some tax or financial reasons why working beyond a certain point may not be as beneficial as you might think.

More Income in Retirement Isn’t Always Better

I will start with a more general but rather important professional observation.

More income in retirement doesn’t always mean you are better off.

There is usually a point, especially at this stage in your life, when you already have a certain lifestyle.

It wouldn’t hurt to have more income, certainly, but you may also not be meaningfully better off.

As a simple example, if someone is comfortable with a $10,000/month lifestyle, working longer to achieve a $12,000/month lifestyle may not result in additional happiness.

Keep in mind that to achieve these “additional income” goals, you may be giving up more quality time with your friends or family.

Required Minimum Distributions (RMDs)

Under SECURE 2.0, age 73 is the year you must begin taking Required Minimum Distributions (RMDs) from your pre-tax accounts.

If you are still earning a high income, these RMDs can easily push you into the 32%, 35% or even the 37% top federal tax bracket.

You essentially end up working for 60 cents on the dollar, if not less, once you account for taxes.

Medicare IRMAA

One of the most frustrating hidden costs of working past a certain point is IRMAA (Income-Related Monthly Adjustment Amount).

This is a surcharge on your Medicare Part B and Part D premiums.

IRMAA is a “cliff” tax, not a sliding scale.

Even if your Modified Adjusted Gross Income (MAGI) exceeds certain thresholds by a single dollar, your Medicare premiums can double or even triple.

This can be even worse for married couples when Medicare premiums for both spouses increase at the same time.

When you combine a healthy salary with mandatory RMDs, you are almost guaranteed to hit these high-cost tiers.

Social Security

Your high income likely ensures that 85% of your Social Security benefits are subject to federal income tax.

While this happens to many retirees, earning more income does not help your tax situation.

The combination of earned income, RMDs, and Social Security creates a “tax torpedo” effect.

This is where every extra dollar you earn potentially subjects more of your Social Security to tax…

AND pushes you into a higher bracket simultaneously.

Lost Opportunity for Roth Conversions

One of the benefits of retiring early is the ability to complete multi-year Roth conversions during “artificially low” income years.

For many of our younger retiree clients, this occurs between their early 60s and RMD age.

This is the golden window for tax planning.

If you stop working or significantly reduce your earned income, there are strategies that can help you meaningfully reduce taxes for the rest of your retirement.

By continuing to work at full capacity, you effectively price yourself out of this strategy.

To be clear, this does require more thorough analysis, but the opportunity is there.

What Does This Mean for You?

There are many benefits to retiring or becoming financially independent as soon as possible.

The other side of this conversation is working for much longer than needed when the financial trade-offs are not in your favor.

I very much hope this newsletter gave you some insights into how to think about income, lifestyle and trade-offs as you plan for the next phase of your life.

As always, thoughtful planning, and not just focusing on the numbers, is what helps turn financial success into real freedom.