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News February 2016

Dollar Sense

Social Security Strategies Slated for the Dustbin in 2016

By Teresa Ambord

File and Suspend is a nice strategy. But again, Congress has put the kibosh on this program going forward. Now, the wife in this example can only receive spousal benefits if her husband — the higher earning spouse — is actually receiving benefits.

You may be familiar with legitimate Social Security strategies that allow you to ultimately collect a great deal more in benefits. Unfortunately, the ax has fallen on these strategies going forward – though not for those currently using these methods – thanks to provisions in the latest Bipartisan Budget Act, passed last November. But if you are qualified — and in some cases act before May 1, 2016— you may be still be able to take advantage of these plans. Here are the details.

 

Restricted Application

One strategy which is about to change is known as “restricted application,” usually filed by the higher earning spouse. For simplicity, we’ll use the example of a wife as the higher earning spouse. Under the old rules, upon reaching full retirement age she — the higher earning spouse — is eligible for her own retirement benefits or for spousal benefits. She opts to file a restricted application and receive only spousal benefits at this time. She can do this even if her spouse has not yet reached his full retirement age.

The result:

  • She collects spousal benefits equal to 50% of her husband’s full retirement age benefit, even if he’s not yet receiving benefits.
  • Her own benefits continue to grow, untouched, up to age 70. Generally benefits grow at about 8% per year.

Later when the wife in this example starts receiving her own Social Security, her husband (the lower earning spouse) can switch and begin collecting spousal benefits on his wife’s record, when he reaches full retirement age. Sound complicated? It’s really not. It’s a legitimate strategy that has allowed many married couples to add greatly to their benefits. Of course… this is one of those things that the government has squelched. The Budget Act phases out the restricted application strategy, but, depending on your age, you may still be able to file.

Your windows of opportunity:

  • If you will turn 66 before May 1, 2016, you can file a restricted application anytime, between the ages of 66 and 70, or
  • If you turned 62 before the end of 2015, you can file a restricted application for spousal benefits when you turn age 66. However, your spouse must be receiving retirement benefits or must have been able to file-and-suspend (see below) before May 1, 2016.

 

File-and-Suspend

This is a popular strategy used mainly by married couples, especially if one spouse has had much higher earnings than the other. Here’s how this works (under the old rules):

When the higher earning spouse (let’s use the example of the husband being the higher earning spouse) reaches full retirement age, he files for benefits. By filing, he triggers his wife’s ability to collect spousal benefits on his earnings record (assuming he has reached full retirement age, spousal benefits generally equal about 50% of his own benefits). Of course, this only makes sense if the spousal benefits are higher than the wife could’ve received on her own record.

Instead of collecting benefits himself, the husband immediately suspends, deferring his own benefits until a later date (usually age 70). Meanwhile, his benefits continue to grow, generally about 8% per year. When he does collect benefits, the monthly checks are much higher, up to 32% higher if benefits are suspended for four years, to age 70.

That’s a nice strategy. But again, Congress has put the kibosh on this program going forward. Now, the wife in this example can only receive spousal benefits if her husband — the higher earning spouse — is actually receiving benefits. That effectively ends file-and-suspend as a desirable strategy going forward. However, if you are already using file-and-suspend, you will be grandfathered in.

Your window of opportunity: If you will turn 66 before May 1, 2016, you can also still file-and-suspend under the old rules. But obviously, you have to act fast, as you must also file before May 1. Don’t wait.

 

Claiming Date

Here’s another reason to file-and-suspend before May 1 if you are eligible – to establish a claiming date. That is, a claiming date for your benefits. Here’s why this matters:

Suppose you are a healthy individual, single or married, and plan to defer taking your Social Security benefits until you reach age 70. Naturally the reason is to defer is to greatly increase your benefits. But suppose again that a life-threatening illness strikes before you reach age 70 (let’s say, 68). You may have a sudden need for money to pay medical bills, or any reason at all. You can file for benefits and request retroactive benefits back to your filing date. If you did file-and-suspend at age 66, that locked in your claiming date and gives you a lump sum of benefits for 2 years. If you did not file-and-suspend, you can still get a lump sum, but only for six months worth of benefits.

As stated earlier, the ability to file-and-suspend is about to vanish. But depending on your age, you may still able to take advantage of it.

Your window of opportunity: If you will turn 66 before May 1 and have not yet claimed benefits, you can still file-and-suspend. But note… it is critical that you file-and suspend before May 1, 2016 or you’ll lose the opportunity.

 

Too Important to Leave to Chance

The decision of when to start receiving your Social Security benefits is subjective, and could greatly impact your future. These changes make the decisions more complicated for some. That’s why it’s important to talk to your financial adviser about the possibilities. Ask for help with claiming your benefits in a timely fashion.

And one more thing… before you settle on a financial adviser, check his or her credentials carefully to ensure you are getting the professional guidance you need.

 

Teresa Ambord is a former accountant and Enrolled Agent with the IRS. Now she writes full time from her home, mostly for business, and about family when the inspiration strikes.

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