Two popular Social Security strategies—”file and suspend” and “restricting an application”—are being eliminated, says a recent Kiplinger article, “Some Social Security Loopholes Will Still be around in 2016.”
Both of these were created by the Senior Citizens Freedom to Work Act of 2000, designed to encourage workers to stay on the job and delay claiming Social Security. This lets their benefits grow to better serve them in retirement. However, as more people took advantage of the changes, yesterday’s “freedom” morphed into today’s “loophole.” And in late October, with no public hearings or debate, Congress voted to end what were termed “aggressive” claiming strategies. However, the good news is that lawmakers are allowing six months to take advantage of the old rules.
File and suspend. When you reach full retirement age (FRA), now at 66 but soon to be 67 for those born in 1960 or later, you can claim your benefits and immediately tell Social Security not to pay you. Only after you claim your benefits can others who qualify for payments based on your work record (your spouse or dependent children) receive those benefits. If you suspend starting the payments for them, you earn delayed retirement credits that will boost your benefit by 8% a year until you reach age 70.
This is the key to many plans to “maximize” lifetime benefits. If you live longer than the average life expectancy, getting higher benefits later (for yourself or as survivor benefits for a spouse) could more than make up for the benefits you passed up earlier. The new law was originally planning to cut off anyone receiving benefits based on the record of someone who had suspended his or her own benefits, and the checks to spouses and dependent children were going to end six months after the bill was enacted. However, lawmakers reconsidered, and now not only will those now benefiting from file and suspend continue to receive payments, but nearly two million others will be able to use this. Anyone who is 66 by May 2 can take advantage of this.
Restricting an application. You are able to apply for Social Security benefits as early as age 62, but waiting until FRA gives you an important opportunity. Before age 66, any application is considered to be a request for your highest possible benefit—whether based on your own work record or your spouse’s. But at FRA, you can “restrict an application” to spousal benefits only, even where it’s less than you’d get on your own. Why do this? So your own benefit will grow at the 8% annually mentioned earlier until you turn 70. The new law zaps out this option for those who turn 62 after January 1. If you’re older than that, you are grandfathered in and can still restrict an application when you reach age 66. Because this is going away, your spouse will be required to be receiving payments for you to get spousal benefits.
Retroactive benefits. These two strategies are for married couples, but another strategy that’s being cut also helps singles. Social Security generally won’t pay more than six months’ worth of benefits retroactively. However, if you file and suspend at FRA, your suspended benefits are in essence banked. So, you can claim all benefits due since age 66 as a lump sum at any point, if you are willing to forgo the accrued delayed retirement credits. This could be valuable if your delayed-claiming strategy based on a long life expectancy is threatened because you become ill at age 69. Under the new law, this “insurance” will be available only to those who turn 66 by May 2.
This is a complex and important part of many retirement income plans, and an estate planning attorney can help you determine what will work best for your situation.
Reference: Kiplinger (January 2016) “Some Social Security Loopholes Will Still Be Around in 2016”
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