Stay in the Loop on Social Security Loopholes
Stay in the Loop on Social Security Loopholes

Stay in the Loop on Social Security Loopholes

 

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Jill L. Ward
Jill L. Ward
CFP®, CTFA

Partner
Wealth Advisor

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Stay in the Loop on Social Security Loopholes

How your Social Security claiming strategies will change in 2016 and beyond.

Just when you thought you had an optimum Social Security benefits strategy in place, the Bipartisan Budget Act of 2015 came along and eliminated two popular strategies born out of loopholes in the system. Commonly known as “file and suspend” and “restricted application for spousal benefits,” these strategies have been used by people over full retirement age to increase the amount of Social Security income received over their lifetime.

How you claim Social Security might be changing. But don’t despair. With the right advice, you can still optimize your Social Security benefit. In fact, you may be grandfathered in if you meet certain age requirements. We’re here to help you make sense of it all.

File and Suspend

File and suspend combines two Social Security provisions that were passed at different times in history. The first is spousal benefits, which allows spouses to collect half of their husband’s or wife’s benefit if it’s higher than his or her own. The second allows anyone over full retirement age to voluntarily suspend a benefit they had started earlier in order to build delayed credits.

Before a spousal benefit can be paid, the spouse on whose record the benefit is calculated must have already filed for benefits. For example, a husband cannot collect a spousal benefit on his wife’s record until his wife has actually filed for benefits.

But what if his wife wanted to wait until age 70 in order to collect a higher amount? This is where file and suspend has come in handy. This strategy requires one spouse (typically the one with the higher earnings record) to file for benefits upon reaching full retirement age, but then immediately suspend those benefits in order to earn delayed credits of 8% per year. By filing, the first spouse opens up his or her record, enabling the other spouse to file for a spousal benefit in the meantime.

After April 30, 2016, this strategy will no longer be available. Anyone can still suspend their benefit after full retirement age in order to build delayed credits (an advantage to those who filed for Social Security early and later regretted the decision). However, any benefits paid off of that record (such as spousal or dependent benefits) will also be suspended.

Going forward couples will be faced with a tough decision: Should all benefits be delayed until the higher earner turns 70 in order for that spouse to receive the maximum amount, or is it better for the higher earner to claim benefits at an earlier age so that spousal benefits can also be started? The answer will depend on many factors, such as the life expectancy of both spouses and the availability of other income sources.

Those currently receiving benefits on a suspended record will not be affected; they fall under the old rules and will continue to receive their benefit. Likewise, anyone age 66 or over who suspends their benefits by the April 30 deadline will also be exempt from the new rules, even if his/her spouse isn’t ready to claim a spousal benefit.

The key is the suspension must be done by April 30, 2016.

Restricted Application

Also known as the “claim now, claim more later” strategy, this is used when one spouse turns full retirement age and wants to collect a spousal benefit while allowing his or her own benefit to continue to grow to the maximum amount. It requires filing a restricted application for a spousal benefit only. This strategy is commonly used when two married high-income earners both want to delay until age 70. One spouse files and suspends at full retirement age while the other spouse files a restricted application for a spousal benefit so they get a source of income in the meantime.

To better understand how this is changing, it helps to take a step back and talk about the “deemed filing” rule. Under current law, anyone under full retirement age who files for benefits is deemed to be filing for all benefits available to them (such as their own benefit and their spousal benefit.) The Social Security Administration compares the two benefits and pays out the larger of the two. On the other hand, those who wait until full retirement age to file can choose between the two benefits, allowing for more flexibility in their claiming strategy.

The new legislation extends the deemed filing rule to age 70 for anyone turning 62 in 2016 or later. These folks will not be able to restrict their application to their spousal benefit and let their own benefit continue to grow –they will be deemed to be taking the higher of the two benefits at the time of filing.

The good news for those who are already 62—or who will be before the end of 2015—is they can still restrict their application to their spousal benefit when they turn 66. It is important to note, however, that this will only work if their spouse has already filed for and is receiving benefits, or has filed and suspended before April 30, 2016.

Divorced Benefits

Divorced individuals have also been able to take advantage of the restricted application strategy. At full retirement age they could restrict their application to their divorced-spouse benefits and switch to their own maximum retirement benefit at age 70. Going forward, those turning 62 in 2016 or later will no longer be able to take advantage of this strategy. In addition, if a former spouse decides to suspend their payments, the divorced spouse benefits will also be suspended. Many believe this to be an unintended consequence of this legislation, and there is thought that a change to the rules in regards to divorced spouse benefits could eventually be made.

Survivor Benefits

The new legislation doesn’t address survivor benefits, so it is widely believed that these will be unaffected. Deemed filing has never applied to widows and widowers, allowing them to file a restricted application for survivor benefits at any point over age 60. The best strategy for anyone eligible for both a survivor benefit and their own is to compare the amount of the survivor benefit if taken at full retirement age (i.e. the maximum survivor benefit) to what his or her own benefit would be if taken at age 70 (i.e. their own maximum benefit). The lower of the two benefits should be taken first, with a switch to the higher benefit once it reaches its maximum.

Consider When to Claim

To maximize Social Security benefits, it’s more important than ever to claim at the appropriate time. Anyone age 66 or older by April 30, 2016 who is not already taking advantage of file and suspend should discuss this option with his or her advisor. It isn’t the answer for everyone, however. Individuals who are considering filing a restricted application or who are enrolled in an HSA plan need to weigh their options first. Those 62 or over by year-end can plan ahead to see if filing a restricted application makes sense.

But even those who are too young to be grandfathered into these strategies can benefit from careful planning. Multiple factors influence a filing decision, including other sources of income, life expectancy, taxes, and marital status. Delaying the start of Social Security still makes a lot of sense for many when considering the guaranteed 8% increase for each year delayed past full retirement age until age 70. Your Trust Company advisor is a great resource to help sort through the options and find the best solution for you.


Important Dates to Remember:

From now until April 30, 2016:
• Anyone over full retirement age can file and suspend.


From now until December 31, 2019:
• Anyone over full retirement age can file a restricted application for their spousal benefit.


2020 and Beyond:
• No file and suspend, no restricted application


Retroactive Benefits Also Eliminated:

If you decided to file and suspend to build delayed credits but later changed your mind, you could request a lump sum payment equal to the suspended benefits. From that point on your benefit would be based on the original full-retirement age amount. This lump-sum payment provision is being eliminated. Going forward, reinstated benefits will be calculated based on any delayed credits earned up until the date of resumption, with no lump-sum payment for any suspended benefits.

Tags:  Divorce, Economic Survival, Financial Decisions, Financial Planning, Financial Security, Social Security, Women

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