Working in retirement can have benefits but can cost money if you're not careful

Special for USA TODAY

Linda and Randy Stephens always dreamed of retiring early, but when Randy was laid off from Honeywell after 35 years, it was Linda who decided to 

go back to work as a teller at Bank of the West.

Their reason? They needed the health insurance. Now they’re both retired, and have subscribed to health insurance through, also known as Obamacare. They live in a modest home on a dirt road in Black Canyon City, Ariz. They take one vacation a year to see Linda’s parents and go bass fishing in Maine.

“We don’t spend our money on furnishings or fancy clothes or trips to Europe,” Linda says. “We live simply.”

So when they were hit in April with a tax bill of $9,000 on top of what they were expecting, it came as a shock. “Apparently, our income last year was just a few hundred dollars over the limit of $47,000 to qualify for the health insurance subsidy in Arizona,” said Randy, now 60. “We had to pay most of it back. We had no income last year, other than my pension from Honeywell and the money from our 401(k).”

Their lesson? Make sure you pay attention to your income in retirement.

Working in retirement can have serious tax and benefit implications.

Social Security

If you’ve already started to collect Social Security, and you’re below what the government calls full retirement age (FRA), you may have to pay some of that back if you make more than $15,720 annually. The amount goes up each year — for 2017 it will be $16,920. If you are collecting Social Security retirement benefits before full retirement age, your benefits are reduced by $1 for every $2 you earn over the limit. In the year you reach FRA, $1 in benefits is deducted for every $3 you earn.

The Social Security Administration (SSA) will dock you if you exceed the limit, but that amount will be returned to you later in the form of a permanent increase.

Tax implications

If you work in retirement, whether part-time or full-time, it’s possible that you will be pushed into the next tax bracket. That’s especially true if you begin taking taxable distributions from your 401(k) or IRA or from a pension. And if you take Social Security on top, that could be taxed as well.

In 2016, joint filers can make up to $75,300 in taxable income ($37,650 for single filers) and still be in the 15% tax bracket. The next bracket is 25%, so anything you make after that you would pay an extra 10 cents on each additional dollar in federal taxes.

“If you’re going to work in retirement, it’s important to keep track every year what you’re income is, and to make sure you don’t end up in a higher tax bracket,” says Scott Laue, a financial adviser at Savant Capital Management in Rockford, Ill.

In such cases, you may want to time your retirement distributions so that you’re not pushed into the next bracket, or to use taxable income such as savings or brokerage accounts, which are taxed on capital gains not as income. And if those investments are sold at a loss, you may be able to use those losses to offset capital gains.

Health and pension benefits

If you’re under 65, when you’ll qualify for Medicare, some people are going back to work just to get health coverage. Even when you’re covered under Medicare, you still will have additional supplements that Medicare won’t cover, which may be covered under an employer-sponsored health plan.

“More and more, health care is impacting the decision on whether or not to continue working,” said Laue. “And part-time work sometimes doesn’t always solve that, especially because many companies don’t extend health care benefits to part-time workers.”

Says Randy: “A lot of our friends are going back to work at Costco or Walmart just to get health coverage.”

Obamacare's income limits put a lot of workers into a difficult gray area —  they make too much to qualify for the health subsidy, but not enough to pay for private insurance.

Pensions are usually unaffected by part-time work, but they do count as income when it comes to tax brackets and qualifying for health subsidies.

Granted, there are good reasons to go back to work in retirement. It can give meaning to life and widen your social network. But increasingly, many Americans are going back to work not just because they want to, but for financial and health insurance reasons. Whatever the reason, it’s best to plan ahead and keep the big picture in mind.

Michael Molinski is a Paris-based economist and writer, and a former retirement editor at Fidelity Investments and a former journalist at MarketWatch and Bloomberg.