Q: I’m 58 and I’m considering taking a lower-paying job for the rest of my career. I’m a bit worried this might affect my future Social Security benefit. How does my projected benefit on my recent Social Security statement get calculated?
If you take a lower paying job, it certainly could impact your Social Security benefits. But, it really depends on your overall earnings history. Your Social Security benefit projection is based on your top 35 highest-earning years. Additionally, Social Security assumes your most recent earnings will continue until your full retirement age of 67.
If you decide to downshift your work, your new, lower salary could find its way into the top 35 years that are used to calculate your benefit amount. However, if you’ve already logged a good record of past earnings, taking a lower paying job might not impact your final benefit all that much. There is a pretty good estimator tool on Social Security’s website that will help you play with the numbers.
On a side note, Social Security just announced their latest inflation adjustment for current beneficiaries. For 2025, Social Security beneficiaries will be getting a 2.5% increase in their benefits. This is the lowest inflation adjustment in the past four years. It might sound odd to current retirees, but it’s a good sign that the inflation adjustment continues to decline!
Q: I just realized I missed last year’s required minimum distribution from my IRA. I’m concerned about possible penalties. What can I do to fix this error?
A: First, the good news! The penalties are a lot lower than they used to be a couple years ago. Starting in 2023, a new law provided some much-needed relief for people who miss their required minimum distribution (RMD.)
Under the new rules, the penalty for not taking an RMD is now 25% of the missed minimum distribution amount. Unbelievably, it used to be a massive 50% penalty! Better yet, if you fix your mistake within the “correction window”, the penalty drops to only 10%. You’d qualify for this much lower penalty if you fix your mistake by the end of 2025. That’s two years after your original distribution deadline.
If you feel you have a good reason for your mistake, you can also request a penalty waiver by filing Form 5329 and explaining your situation. However, there isn’t much guidance on what constitutes a “good reason.” But, it’s certainly worth a try if you feel your life circumstances justified your oversight.
The funny thing is the IRS often waived the old, massive penalty. Now, with their much lower penalties, tax experts wonder if they’ll be far less lenient. Logically, this makes some sense. Only time will tell.
