Special to USA TODAY
Published 5:19 AM EDT Sep 18, 2019
Question: I am 67, still working and contributing to my 401(k) plan. I also have an IRA account elsewhere. I do not plan to file for Social Security until age 70. First question: If I work past age 70, even though my employer continues to deduct for Social Security, will my earnings during year age 71 be used to recalculate my benefit amount, or is my benefit fixed at age 70 going forward? I know Social Security takes a weighted average of my highest 35 years of earnings, and I did have several years of minimal wages within the highest 35 years. Second question: If I work past age 70 and continue to contribute to the company’s 401(k) plan, do I still need to take a required minimum distribution from either/or the 401(k) or IRA account? My financial adviser gave me his answer, which is I don’t need to withdraw from the 401(k), but I do need to withdraw from the IRA. Do you agree?
– Steve T.
Answer: Earnings at any age from the year a person turns 22 and onward are used in the calculation of your Social Security benefit, says Jim Blankenship, a financial planner with Blankenship Financial Planning in New Berlin, Illinois.
If you’re still working while receiving your Social Security benefits, each year the earnings from the previous year are added to your record. If the earnings in that year are greater than one of the earlier years, your benefit may be increased, Blankenship says.
As a side note: Your earnings are indexed prior to age 60, and earnings after age 60 are not, he says.
The indexing essentially applies inflation to the earlier earnings. “As a result of the indexing, earnings at your age, 70, for example, might not be higher than an earlier indexed amount,” says Blankenship. “The benefit calculation looks at all of these earnings over your lifetime and averages the top 35 years – whenever they were earned.”
Read Indexing Factors for Earnings to learn more about how the Social Security Administration uses something called the national average wage indexing series to index a person’s earnings. Such indexation ensures that a worker’s future benefits reflect the general rise in the standard of living that occurred during his or her working lifetime.
As for question number two, your adviser is correct. If you’re still working at the employer sponsoring the 401(k) plan, you don’t have to take RMDs from that account at age 70½, says Blankenship. This assumes that you are not a 5% or greater owner of the company. If you are, then you are subject to RMDs on the account whether or not you’re still employed at age 70½. Otherwise, you will be subject to RMDs in the year that you retire, if it’s after age 70½.
The IRA does not, however, have this feature. You are required to begin RMDs in the year that you reach age 70½. “Incidentally, this also applies to 401(k) or other retirement plans at former employers as well,” says Blankenship.
Note too that the first RMD could be delayed until as late as April 1 of the year after you reach age 70½, but each subsequent RMD must be taken by Dec. 31 of the tax year. If you decide to delay the first RMD after the end of the year when you reach age 70½, you’ll have to take two RMDs in the following tax year, says Blankenship.