UNRETIREMENT

The Social Security and tax laws hold hidden traps and rewards for the growing army of well-off folks who just keep on working.

The Social Security and tax laws hold hidden traps and rewards for the growing army of well-off folks who just keep

on working.

COACH NANCY LIEBERMAN,

56 LIFETIME STATS: TWO-TIME OLYMPIC BASKETBALL PLAYER. COACH OF WNBA’S DETROIT SHOCK, AND FIRST WOMAN TO BE HEAD COACH OF A MEN’S PRO BASKETBALL TEAM.

RETIREMENT PLAY: DON’T RETIRE. LIEBERMAN STILL WORKS AS ASSISTANT GENERAL MANAGER FOR THE TEXAS LEGENDS OF THE NBA DEVELOPMENT LEAGUE, AND AS A TV ANALYST. THROUGH HER FOUNDATION SHE HAS BUILT 13 “DREAMCOURTS” IN UNDERPRIVILEGED COMMUNITIES.

PEP TALK: “Somebody said to me, ‘Once you stop playing basketball and retire, you’ll never do anything anymore.’ What am I retiring from? Life? I think the more active you are, the healthier you are, and your mind is sharp.”

Last year Alice Finch Lee passed away at the age of 103. The older sister of author Harper Lee, she was also known for her own extraordinary achievement: She was a practicing lawyer until the age of 100.

While most Americans don’t plan on working until the century mark, many, particularly better-educated folks, are pushing of retirement or working while “retired.” In 2013, 51% of the highest-income quartile of those 65 and older worked. Even more striking, work accounted for 44% of total income in this quartile, more than Social Security and pensions combined, as James Poterba, president of the National Bureau of Economic Research, calculates.

In theory, federal policy encourages this. The Senior Citizens’ Freedom to Work Act of 2000 eliminated the “earnings test” for Social Security benefciaries who have reached the “normal” or “full” retirement age—66 for those born from 1943 through 1954. In practice? There are still hidden traps, but there are also some lucrative opportunities. Here’s what you need to know.

THE EARNINGS TEST SURVIVES

The Social Security earnings test, with its many wrinkles, survives until you reach 66. You can claim (reduced) benefts at age 62, but if you do you’ll be docked $1 in benefts for every $2 in earned income you have above $15,720 a year. If you claim benefts midyear, however, you can elect to have the earnings test applied on a month-by-month basis, with a current ceiling of $1,310 a month. That means if you get a $1 million bonus in January, and retire and claim Social Security in February, you’d lose benefts only in those months (if any) where your earnings exceeded $1,310.

In the calendar year you turn 66, a diferent, more generous rule ap- plies: You can earn up to $41,880 in the months before you turn 66 and will lose only $1 in benefts for each $3 you earn above the threshold. And get this: The same $41,880 ceiling applies whether you turn 66 in February or December.

Is the earnings test unfair? Not really. You get credit for the docked benefts, leading (in most cases) to a larger check later. Still, if you’re working more than part-time, it usually doesn’t make sense to claim before 66 and often pays to wait until 70—at which point you stop earning additional delayed retirement credits. Note that if you continue to earn more than the maximum amount taxed by Social Security—that’s $118,500 this year—your check at 70 will almost certainly be bigger than it would have been if you had stopped working at 60 and simply waited until 70 to claim. Of course, you must continue to pay Social Security taxes on earned income regardless of age, so this is hardly a giveaway.

THE INSANELY COMPLICATED RULES FOR RETIREMENT ACCOUNTS ARE EVEN CRAZIER FOR OLDER FOLKS WHO WORK, BUT YOU CAN PLAY THEM TO YOUR ADVANTAGE.

For married and widowed folks simply putting of claiming any benefts until 70 doesn’t necessarily produce the most in total benefts. Some married partners will do best by claiming Social Security “spousal” benefts at 66 and then fling for benefts based on their own earnings history at 70, all the while continuing to work. Widows and widowers, for their part, should usually claim “survivor’s” benefts at the earliest age those benefts won’t be completely wiped out by earnings from work (that could be earlier than 66) and their own earned benefts at 70, advises Boston University economics professor Laurence J. Kotlikof, a Forbes.com contributor and coauthor of a new book, Get What’s Yours: The Secrets to Maxing Out Your Social Security (Simon & Schuster).

YOUR BENEFITS WILL BE TAXED

Anywhere from 0% to 85% of your Social Security benefts are taxable, depending on how high your “combined” income is. What’s that? Your normal adjusted gross income, plus your tax-exempt muni bond interest, plus one-half of your Social Security check. When combined income rises above $44,000 for a couple, or $34,000 for a single, up to 85% of Social Security benefts may be subject to tax. While some affluent seniors living of investments may be able to keep their income low enough to avoid the full 85% hit, seniors who work should assume 85% of their Social Security benefts will be taxed.

RETIREMENT SAVINGS GET TRICKIER

The insanely complicated rules surrounding both contributions to and distributions from retirement accounts are even crazier for older folks who work. For example, beginning in the year you hit 70½, you can no longer make either pre- or aftertax contributions to a traditional Ira—the kind where earnings are tax- deferred and withdrawals are taxed. Yet you can still make aftertax contributions to a Roth IRA, where your investments grow completely tax-free. Not so coincidentally, 70½ is also the age at which you must start taking required minimum distributions from a traditional IRA, but not from a Roth IRA.

While there are no age limits on Roth contributions, there are income restrictions. For 2015 a couple aged 50 or older can contribute $6,500 each ($13,000 total) to a Roth IRA, if their modifed adjusted gross income is below $183,000 and one of them has that much in earned income. (No, you can’t fund a Roth from investment income.) Partial contributions are allowed up to $193,000. For singles and heads of households a full $6,500 contribution is allowed up to $116,000, and a partial one up to $131,000. (For 2014 contributions, which may be made until Apr. 15, slightly lower income limits apply.)

Fortunately, there are other options that allow you to continue shoveling earnings into tax-favored retirement accounts. Whatever your age, you can continue to make contributions to any plan your employer offers, including a traditional 401(k), a Roth 401(k) and a Simple IRA. While you must start taking required minimum distributions from a Simple IRA at 70½, if you’re still working, you can delay taking money out of a 401(k) past the mandatory distribution age, so long as you don’t own 5% or more of the company.

What if you’re self- employed? Maybe you’ve been contributing to a SEP IRA or a Keogh, plans that allow you to save pretax up to 25% of your net earnings from selfemployment, with a contribution cap of $53,000 for 2015. Consider switching to a “solo” or “individual” 401( k): It has a $59,000 overall limit (including a $6,000 catch-up contribution for those 50 and older, which you don’t get with the others), plus big advantages if you’ve cut back your hours and earnings or want to build a Roth nest egg.

With the 401(k) you can stuf 100% of the frst $24,000 you earn into a 401(k) as a pretax or Roth “employee” contribution and then contribute another 25% of earnings pretax as an “employer” contribution. And while you must start taking minimum withdrawals from all of these plans at 70½ (regardless of work status), you can roll your 401(k) Roth money ( both contributions and earnings) to a Roth IRA, tax-free.

Here’s the play: Once in the Roth IRA, the funds can continue to grow tax-free with no mandatory distributions during your lifetime. You can withdraw cash, if you need to, without raising your income and tax rate, or you can leave a tax-free kitty to your heirs. Note: Not all providers of solo 401(k)s ofer the Roth option. Vanguard, E-trade, T. Rowe Price, Merrill Edge and TD Ameritrade do; Fidelity Investments and Charles Schwab don’t.