CRPC Phased Retirement and Working in Retirement — Questions and Answers
Question 1: A retiree who claims Social Security benefits before Full Retirement Age (FRA) and continues to work is subject to the Earnings Test. In 2024, for every $2 earned above the annual exempt amount, benefits are reduced by:
- $1 (Correct answer)
- $2
- $3
- 50 cents
Correct answer: $1
Under the Social Security Earnings Test, beneficiaries who claim before their FRA have $1 of benefits withheld for every $2 earned above the annual exempt threshold (approximately $22,320 in 2024). In the year a retiree reaches FRA the reduction is more lenient ($1 for every $3 above a higher exempt amount), and once FRA is reached the Earnings Test no longer applies. Withheld benefits are not permanently lost — they are recredited as a higher monthly benefit going forward.
Question 2: Which of the following BEST describes a formal 'phased retirement' arrangement offered by an employer?
- An employee switches entirely to freelance work for a different employer before fully retiring
- An employee gradually reduces hours and responsibilities while beginning to draw retirement benefits from the employer's plan (Correct answer)
- An employee delays Social Security past age 70 to maximize delayed credits
- An employer contributes to a Roth IRA on behalf of an employee nearing retirement
Correct answer: An employee gradually reduces hours and responsibilities while beginning to draw retirement benefits from the employer's plan
Formal phased retirement programs allow employees to reduce their work schedule and responsibilities while simultaneously accessing partial pension or retirement plan benefits from their current employer. These arrangements can benefit both employers (knowledge transfer, retained talent) and employees (gradual psychological transition, partial income, continued health benefits). The federal government implemented formal phased retirement rules for federal employees under the Moving Ahead for Progress in the 21st Century Act.
Question 3: A 68-year-old retiree returns to part-time work earning $30,000 per year. Which statement about Social Security is CORRECT in this scenario?
- Benefits will be reduced by $1 for every $2 earned above the annual exempt amount
- The retiree must suspend Social Security benefits while working
- The Earnings Test no longer applies, so benefits are not reduced regardless of earnings (Correct answer)
- The retiree's Medicare Part B premiums will be reduced due to the additional earned income
Correct answer: The Earnings Test no longer applies, so benefits are not reduced regardless of earnings
The Social Security Earnings Test only applies to individuals who claim benefits before their Full Retirement Age (FRA). At age 68, which is past FRA for all current retirees, a beneficiary may earn any amount without any reduction to Social Security benefits. The retiree in this scenario keeps full benefits regardless of earned income level.
Question 4: When a retiree returns to part-time work and regains employer-sponsored health coverage, the MOST important Medicare coordination issue to consider is:
- Whether the retiree must enroll in Medicare Part D to avoid a late-enrollment penalty
- Whether the employer plan or Medicare is the primary payer, which depends on employer size (Correct answer)
- Whether Medicare Part A premiums will increase due to the additional earned income
- Whether the retiree must disenroll from a Medicare Advantage plan to use employer coverage
Correct answer: Whether the employer plan or Medicare is the primary payer, which depends on employer size
When a Medicare enrollee has both Medicare and employer-sponsored coverage, the coordination of benefits (primary vs. secondary payer) depends on employer size. For employers with 20 or more employees, the employer plan is primary and Medicare is secondary. For employers with fewer than 20 employees, Medicare is primary. Getting this coordination wrong can result in claim denials and unexpected out-of-pocket costs.
Question 5: Which of the following is a key financial planning advantage of an 'encore career' (paid second career in retirement) compared with simply drawing down a portfolio?
- Encore career income is exempt from federal income tax under current IRS rules
- Earned income can enable continued Roth IRA contributions, allowing tax-advantaged growth to continue (Correct answer)
- An encore career automatically defers Required Minimum Distributions indefinitely
- Medicare Part B premiums are waived for individuals with earned income below $50,000
Correct answer: Earned income can enable continued Roth IRA contributions, allowing tax-advantaged growth to continue
One often-overlooked benefit of an encore career is that earned income (wages or self-employment income) is required to make IRA contributions. A retiree with earned income can continue contributing to a Roth IRA (subject to income limits) or a Traditional IRA, preserving tax-advantaged growth and potentially offsetting the income from the encore career through deductions. RMDs from employer plans may be delayed if still working for that specific employer, but only for current employer plans — not IRAs.
Question 6: A client considering part-time consulting work in retirement asks about self-employment tax implications. Which statement is CORRECT?
- Retirees receiving Social Security are exempt from self-employment tax on consulting income
- Self-employment tax only applies to net consulting income above $50,000 per year
- Net self-employment income above $400 is subject to self-employment tax, but the deductible half reduces adjusted gross income (Correct answer)
- Self-employment tax is waived once a retiree reaches age 65
Correct answer: Net self-employment income above $400 is subject to self-employment tax, but the deductible half reduces adjusted gross income
Self-employment tax (15.3% on net earnings up to the Social Security wage base, 2.9% above) applies to anyone with net self-employment income exceeding $400, regardless of age or Social Security status. However, self-employed individuals can deduct 50% of the self-employment tax paid when calculating adjusted gross income, partially offsetting the cost. There is no age exemption from self-employment tax.
CRPC Phased Retirement and Working in Retirement
A retiree who claims Social Security benefits before Full Retirement Age (FRA) and continues to work is subject to the Earnings Test.
In 2024, for every $2 earned above the annual exempt amount, benefits are reduced by: