A big Social Security loophole is closing, but there's still time for seniors to jump through it and sock away some cash.
We've already mentioned that the Bipartisan Budget Act of 2015 is closing Social Security's “file and suspend” loophole on April 30. Once both members of a couple reached retirement age, that loophole made it possible for the higher earner to file for benefits and suspend them until age 70 while the lower earner could file for the other's spousal benefit -- which is up to 50% of the highest earner's Social Security benefits. Within the couple, each member's own benefits would go untouched and continue to grow until age 70, when the lower earner could stop taking the spousal benefit and go for the higher benefit if necessary.
“It’s basically free money,” says Laurie Samay, a certified financial planner and portfolio manager with Palisades Hudson Financial Group. Yes, a free money scheme that's going the way of the dodo.
Also gone is the “restricted application” loophole that allowed someone who was full retirement age or older and eligible for either his own retirement benefit or a spousal benefit to restrict the scope of his application to receive only the spousal benefits the applicant is entitled to. That maneuver allowed the applicant to continue earning delayed credits on his own record until filing age 70. That allowed many couples to delay filing to the maximum age 70 benefit while allowing one of them to receive four years of spousal benefits from age 66 to 70.
“The 'file and restrict' strategy isn’t as much of a surprise as the 'file and suspend' elimination,” said Griffin Geisler, manager of RBC Wealth Management's Internal Wealth Center. “This is definitely a middle class 'strategy,' and its elimination will affect a lot of dual income households that certainly wouldn’t consider themselves wealthy."
This decision also affects divorced spouses, who were able to file and restrict their own benefits and receive a 50% spousal benefits if they were married to their ex for ten years or more. Under the old rule, if a person filed and restricted his or her benefits at age 66, they would see see benefits increase at least 32% to the maximum awarded at age 70.
If you haven't reached retirement age, that bridge to 70 is gone. If you have, however, you'd best make some decisions.
“Learn about and weigh your options now,” Samay says. “Don’t wait until late March. It can take more than a month to get an appointment with your local Social Security office.”
You must turn 66 and file and suspend by April 30 for the strategy to work. Otherwise, if you file and suspend your benefits, any auxiliary benefits based on your record -- such as spousal benefits -- will be suspended as well. You must be at least 62 to file a restricted application for spousal benefits. Why do so, you ask? Because it's in your best financial interests if you're of age.
In an example Samay provided, John turned 66 last year and is currently eligible to receive Social Security benefits of $2,400 per month. His wife, Sue, is 63 years old, and is eligible to receive $1,100 per month. John files and suspends, and Sue files for spousal benefits. She will collect half of his monthly benefit, or $1,200 (plus a lump sum for spousal benefits retroactive to his full retirement date). At age 70, John will reactivate his benefits, since he will no longer benefit from delaying. Sue can either continue to collect spousal benefits, or switch to her own record at age 70.
By RBC's estimates, dual-income married couples who were contemplating this option, but won't hit the age thresholds in time, could lose as much as $60,000 in benefits over a four year period as a result of the elimination of the file-and-suspend strategy. Also, as Samay points out, if you collect Social Security benefits at age 62, you’ll get a much lower monthly payout than if you had waited until your full retirement age (FRA), which varies from ages 65 to 67 depending on your birth year. If you can afford to wait until age 70, you’ll get even more per month. Thus, if you don't have a Social Security bridge to that age, you're costing yourself even more money by filing early.
If you’re divorced and your marriage lasted ten years or more, you can receive benefits on your ex-spouse's record (even if he or she has remarried), Samay says, so long as you haven’t remarried, are at least age 62 and are entitled to Social Security retirement or disability benefits. A divorcee can file a restricted application for spousal benefits and continue to accrue credits on his or her own record until age 70 if he or she turned 62 by January 1, 2016. Otherwise, the divorcee will receive the greater of his own retirement benefits and the spousal benefits to which he is entitled, with no additional credit accrual.
“Due to the law change, those who do not meet the age requirement and want to retire at full retirement age have to decide whether to take 100% of the benefit they earned based upon their own work history or 50% of what their ex would get at full retirement age,” said Gail Buckner, vice president and national planning spokesperson at Franklin Templeton Investments. “If they want or need more income than this, their only option is to delay starting Social Security and keep working.”
If you aren't sure that you want to file and suspend, there are other options available. For those who need more current income, but may miss the April 30 deadline, Samay suggests having the lower-earning spouse file for benefits and not suspend them, while the higher-earning spouse files a restricted application for spousal benefits. When the higher-earning spouse reaches age 70, he can switch to benefits based on his own record, which will have increased over time. However, the lower-earning spouse will not have accrued additional credits, Samay notes.
That strategy will provide additional current income for the couple and the same survivor benefits for the spouse as file-and-suspend, since the higher-earning spouse can keep accruing benefits on his record. However, the higher-earning spouse must be 62 or older for this to work.
“If you continue to be eligible for these strategies, you should educate yourself and make an informed decision about implementing any SocialSecurity strategies,” Samay says. “Of course, you should avoid rushing out to file and suspend just because you are about to lose the chance. As with any Social Security approach, careful planning is key.”
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.