Navigating Social Security While Working: Essential Insights for Vistra Employees

65 is the new 55 when it comes to retirement from your Vistra firm, meaning you may have the option to work at the same time you claim Social Security benefits. If you retire from Vistra and get a part-time job or some consulting income, your paycheck can affect the amount you receive monthly, the amount you owe in taxes for the year, and your Medicare premiums.

Reasons abound to keep working, but for most, it simply comes down to math and to emotions.

With a longer lifespan on average, many of our clients from Vistra are concerned they won't have enough savings to last their lifetime, and understandably so.

If you plan to keep working after retiring from your Vistra while collecting Social Security, here is what you need to keep in mind:

Timing Matters

If you start your Social Security benefits before your (FRA), or full retirement age (which is between 66 and 67, depending on the year you were born), you will end up with a permanently reduced monthly benefit because of the early age. If you claim at the earliest possible age of 62, your monthly checks could be up to 30% less than at your full retirement age(FRA). ¹

There will also be an earnings test until you reach that full retirement age(FRA): If you have earned income in excess of $19,560 in 2022, your benefits will be reduced by $1 for every $2 of earned income over the limit.

The year you reach your full retirement age(FRA), the earnings test limit is $51,960 in 2022, and your benefits will be reduced by $1 for every $3 of earned income over the limit.

These reduced benefits do not just 'disappear'. If your benefits have been reduced due to earnings, your monthly Social Security check will be increased after your full retirement age(FRA) to account for benefits withheld earlier due to excess earnings.

Note: Earned Income does not include investment income, pension payments, government retirement income, military pension payments, or similar types of 'unearned' income.

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'Earned Income' includes wages, net earnings from self-employment, bonuses, vacation pay, and commissions earned—because they're all based upon employment. Once you reach your full retirement age(FRA), there is no earnings test and no benefit reductions based on earned income.

Scenarios: Claiming Social Security at 62 while working

This hypothetical example is calculated by Fidelity Financial Solutions Team, using Social Security and tax tools. The tools are based on data and methodology published by the Social Security Administration (as of March 2022) and Internal Revenue Service (as of March 2022). All benefits are calculated in today’s dollar.(See: Income Taxes And Your Social Security Benefit for more information.). The actual benefit would be adjusted for inflation. State/Local taxes are not considered. All the numbers are rounded to the closest $500. Example assumes an individual turning 62 in 2022, makes $100K/year before retirement, $65K/year expenses in retirement, receives $24K/year Social Security benefits at age 62, single tax filing status, and standard deduction for federal tax purpose. Any additional income needs are covered by withdrawals from tax deferred account, therefore are fully taxable.

Tax Impacts

Separate from the earnings test, Social Security benefits themselves are subject to federal income taxes above certain levels of 'combined income.' Combined income generally consists of your adjusted gross income (AGI), ² nontaxable interest, and one-half of your Social Security benefits.

For individual filers with combined income below $25,000, none of your Social Security is taxed. For joint filers with combined income below $32,000, none of your Social Security is taxed. (See: Income Taxes And Your Social Security Benefit for more information.)
For individual filers with combined income of $25,000 to $34,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $34,000, then up to 85% of your Social Security benefits could be taxed.
For joint filers with combined incomes of $32,000 to $44,000, 50% of your Social Security benefit may be subject to federal income taxes. If your combined income exceeds $44,000, then up to 85% of your Social Security benefits could be taxed.

Regardless of your income level, no more than 85% of your Social Security benefits will ever be subject to federal taxation.

Additionally, 11 states also tax your Social Security benefits. The rules and exemptions vary widely across this group so it is wise to research the rules for your state or consult with a tax professional if you're one of our Vistra clients that this applies. ³

State Social Security Tax

The eleven states below impose a tax on Social Security benefits to varying degrees.

Colorado

Colorado's pension-subtraction system exempts up to $24,000 in pension and annuity income, including some Social Security benefits. The exemption is based on your age, starting at age 55.

Connecticut

Connecticut partially or fully exempts Social Security benefits, based on a person's filing status and income.

Kansas

Kansas exempts Social Security benefits from state tax, based on the taxpayer's income. Your Social Security benefits are exempt from Kansas income tax if your federal adjusted gross income (AGI) is $75,000 or less, regardless of your filing status.

Minnesota

Minnesota partially taxes Social Security benefits. The state allows a subtraction from benefits ranging from $2,725 for married taxpayers who file separately, to $4,260 for single taxpayers, to $5,450 for married taxpayers who file jointly. The rule is subject to phaseouts starting at incomes of $82,770 for joint married filers, $41,385 for married taxpayers filing separately, and $64,670 for heads of household and single filers. The subtraction is less for these incomes and eventually phases out entirely as you earn more.

Missouri

Missouri exempts Social Security benefits from state tax, provided that the individual is age 62 or older and has adjusted gross income of less than $100,000 if married and filing jointly, or $85,000 for all other filing statuses. Those who earn more than that might qualify for the exemption if they're disabled.

Montana

Montana asks residents to use the Montana Individual Income Tax Return to determine the portion of Social Security benefits that's taxable by the state (page 5 and page 6). That might be different from the federal amount.

Nebraska

Starting in 2022, Nebraska began phasing out taxation of social security benefits. The state allows a deduction for Social Security income that's included in your federal adjusted gross income if your federal Adjusted Gross Income(AGI) is less than or equal to $61,760 for married couples filing jointly, or $45,790 for all other filers.

New Mexico

Starting in 2022, the state of New Mexico changed rules that would exempt most seniors from paying tax on social security benefits. This exemption is available to taxpayers with the following income thresholds — $100,000 for single filers, $150,000 for married filers filing jointly, and $75,000 for married filers filing separately.

Rhode Island

Rhode Island has an exemption on Social Security taxation for those who have reached full retirement age as defined by the IRS. Eligible taxpayers must have federal Adjusted Gross Income(AGI)s of $88,950 if single, or $111,200 if married and filing jointly.

Utah

In late 2019, Utah adopted a sweeping tax bill that includes a tax credit for Social Security benefits that are included in a taxpayer's federal adjusted gross income. The Adjusted Gross Income(AGI) thresholds are $25,000 for married filing separately, $50,000 for married filing jointly, and $30,000 for single filers.

Vermont

Vermont previously followed the federal rules for determining the taxable portion of Social Security benefits, and then it adopted exemptions for taxpayers with incomes below $25,000 for single filers and $32,000 for other statuses. Benefits for those with higher incomes are taxed at incremental levels, with no exemption available for Adjusted Gross Income(AGI) of over $55,000 if single or over $70,000 if you're married and file jointly.

Medicare & Social Security

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.

These earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

If you are making much less in retirement than before, could it hurt your benefits?

No. This is because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact; at best, it could help if this replaces any of the lower 35 years.

Note: Your earnings may not only push you into a higher tax bracket, but also into a higher threshold for your Medicare premiums once you are over 65. Medicare sets the cost (premium) for Part B each year at a fixed rate for most participants ($170.10 a month for 2022), but it increases for individuals with an annual income over $91,000 and married couples with an annual income above $182,000. The cost for these higher-earning participants can range from $238.10 to $578.30 per month in 2022.

If your income is above a certain level, you may have to pay IRMAA (Income-Related Monthly Adjusted Amount) in addition to your Part B or Part D premium. We recommend you consult with a tax professional for more details on whether or not you are affected.

Can I Contribute to a Retirement Account?

Another key advantage of ongoing earned income even after you collect Social Security is that you can keep contributing to your retirement savings accounts like traditional IRAs, health savings accounts (HSAs), Roth IRAs, and 401(k)s.

Note: If you are over 72, you will have to take the required minimum distribution (RMD) from your traditional IRA, except for during the 2020 pause because of COVID-19.

Your traditional 401(k), or similar Vistra retirement plan, is a different story. In general, you can continue stashing away money in your current Vistra-provided plan as long as you're still working, even part-time, and you can delay taking your RMD until after you retire.

These additional savings can help, especially if your savings are running a bit behind your goals. The combination of the added savings, tax-deferred growth potential, and the ability to defer tapping into your savings can be powerful, even at the end of your working career.

How does the eligibility criteria for participation in the Vistra Operations Company pension plan differ for represented and non-represented employees? Specifically, what factors should an employee of Vistra Operations Company consider in understanding whether they qualify for the PRB Structure of the Plan based on their employment agreements and status?

Eligibility Criteria for Represented and Non-Represented Employees: The Vistra Operations Company pension plan has distinct eligibility criteria for represented and non-represented employees. Non-represented employees hired or rehired on or after January 1, 2019, are not eligible to participate in the plan, as their benefits were frozen effective December 31, 2018. Represented employees are subject to their collective bargaining agreements, and their participation may vary depending on the terms of those agreements(Vistra_Operations_Compa…).

What steps should an employee at Vistra Operations Company take if they wish to contest a denial of benefits they believe they are entitled to under the plan? Please outline the procedures outlined in the document that the employees must follow to ensure their rights under the Employee Retirement Income Security Act are upheld.

Contesting a Denial of Benefits: Employees must file a written claim for benefits if they believe they were denied benefits under the plan. The plan administrator reviews the claim, and if it is denied, the employee has the right to request a review of the denial within 60 days. Employees can provide additional documentation and will receive a final decision within 60 to 120 days depending on circumstances. If the claim is denied after review, the employee has the right to file a civil action under ERISA(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).

For employees of Vistra Operations Company who are nearing retirement age, what options do they have concerning their pension benefits, and how can they make the most informed decision regarding the form of payment they choose? What factors specific to their circumstances and relation to the plan should they consider, such as marital status or previous employment benefits?

Options for Employees Nearing Retirement: Employees nearing retirement have several options for receiving their pension benefits, including single life annuity or joint and survivor annuity payments. Factors such as marital status, existing benefits, and personal financial circumstances will affect their decision. For instance, married employees may elect a joint and survivor annuity, which provides reduced monthly payments during their lifetime and continues to pay a portion to their spouse after their death(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).

In what ways does the Vistra Operations Company pension plan accommodate employees transitioning from another employer's retirement plan, particularly with frozen benefits under an acquired plan? Employees should consider how these changes could impact their retirement outcomes and what steps are needed to integrate these benefits.

Transitioning from Another Employer’s Retirement Plan: Employees who transition from another employer’s retirement plan, especially those whose benefits have been frozen under an acquired plan, may still be eligible for interest credits on their account balances. The plan allows these employees to continue receiving interest credits while their account remains in the plan, preserving the value of their retirement savings(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).

How can employees of Vistra Operations Company name a beneficiary in relation to their retirement benefits, and what specific requirements must be met to ensure that the designation is legally valid? Discuss the implications for both the employees and their chosen beneficiaries, including any necessary consents or notarizations.

Naming a Beneficiary: Employees can designate a beneficiary for their pension benefits, and if they are married, their spouse must provide notarized consent if they choose someone else as their beneficiary. It is important to update this information following life changes, such as marriage or divorce, to ensure benefits are distributed according to their wishes(Vistra_Operations_Compa…).

What provisions are in place within the Vistra Operations Company pension plan for employees who become disabled before reaching retirement age? Employees should understand how disability benefits interact with their retirement benefits and what criteria they must meet to access these provisions.

Provisions for Disabled Employees: Employees who become disabled before reaching retirement age may still be eligible for 100% vesting in their pension benefits. The plan recognizes disability as a qualifying event for full vesting if the employee receives Social Security disability benefits(Vistra_Operations_Compa…).

How does the annual interest crediting rate for defined benefit plans apply to employees of Vistra Operations Company, and what recent adjustments have been implemented that might affect their retirement savings? Review the specifics in relation to current economic indicators affecting these plans.

Annual Interest Crediting Rate: For defined benefit plans, the interest crediting rate is based on the 30-year Treasury securities rate, which can affect employees’ retirement savings. Represented employees may be subject to minimum interest credit rates depending on their collective bargaining agreements, while non-represented employees' interest credits continue even after benefits were frozen(Vistra_Operations_Compa…).

What are the implications of being classified as a non-represented employee under the Viesta Operations Company pension plan, especially considering the plan was frozen for them starting January 1, 2019? Employees should evaluate how this classification impacts their retirement planning and options moving forward.

Impact of Being a Non-Represented Employee: Non-represented employees had their benefits frozen as of December 31, 2018. This freeze means they no longer accrue new benefits, but they may still receive interest credits on their existing frozen benefit. Employees in this classification should evaluate alternative retirement savings options moving forward(Vistra_Operations_Compa…).

Could you explain the importance of the â€œnormal retirement ageâ€ and how it affects the pension benefits for participants in the Vistra Operations Company pension plan? Illustrate how this age plays a significant role in defining eligibility and benefit calculations.

Importance of "Normal Retirement Age": The normal retirement age under the plan is 65. This age is critical because it affects when employees become eligible for their full pension benefits without reduction, which plays a significant role in the calculation and payment of benefits(Vistra_Operations_Compa…).

What are the best ways for employees of Vistra Operations Company to contact the Plan Administrator to obtain additional information about their pension benefits and claims? Provide details on the resources available and the recommended channels for reaching out effectively, particularly regarding any changes in address or personal details affecting their benefits. These questions are designed to guide employees through the retirement process and help them navigate the specifics of their pension plan under Vistra Operations Company.

Contacting the Plan Administrator: Employees can contact the Vistra Pension Center for information regarding their pension benefits. They can reach the center at 1-855-568-4146 or online at http://ypr.aon.com/Vistra for assistance with questions or changes to their personal details(Vistra_Operations_Compa…)(Vistra_Operations_Compa…).