Many considerations go into the decision on when to claim Social Security benefits, such as health status, financial resources, age, lifestyle, etc. Barring any health concerns and immediate cash flow needs, it usually makes the most sense to delay benefits as long as financially possible. Married couples past full retirement age have been able to benefit by collecting off one spouse’s record while delaying the other spouse’s benefit. Then, at least some cash flow comes in while maximizing lifetime benefits for the couple. However, after April 29, 2016, certain Social Security claiming strategies will no longer be an option.
File and suspend
The file-and-suspend method is one of the strategies that won’t have the same effect. There are two situations that are impacted by this change.
Lump sum payment of suspended benefits
An individual who has reached full retirement age (66 for current retirees) could file for a benefit, then suspend it until a later date (up to age 70) to allow the benefit to earn delayed retirement credits of 8 percent for each year of postponement. This provides flexibility in case s/he changes their mind or circumstances change creating a need to collect earlier. If so, s/he can claim lump-sum payment of all benefits that were suspended since the time of filing. Otherwise, only the prior six months of benefits would be caught up. S/he would forfeit the delayed retirement credits and collect lifetime benefits based on the age when originally filed. The option to later take a lump-sum to catch up payments is ending for those who do not file and suspend by April 29th.
Spousal benefit
The file-and-suspend method allows spouses to maximize benefits as a couple. At full retirement age, a spouse can collect the higher of a retirement benefit off their own record or 50 percent of their spouse’s benefit. When one spouse earned much more than the other spouse, 50 percent of the higher-earner’s record is usually greater. However, in order to be able to collect a benefit off the other spouse’s record, their spouse would have to have filed for their own benefit after full retirement age and either be currently collecting or have suspended the benefit. If the spouse doesn’t want to collect yet and wants to allow their own benefit to earn the delayed retirement credit, s/he could file and suspend their own benefit so the spouse can begin collecting benefits. The delayed retirement credits not only benefit the couple for lifetime, but also the surviving spouse. Under the new law, a spouse can collect only the larger benefit—not switch records—and as long as a spouse’s benefits are suspended, no one can collect off their record.
Restricted application
Under current law, a spouse at full retirement age can file a restricted application to receive only spousal benefits, delay their own benefit, then switch to their own record later (no later than age 70). This has been advantageous when each spouse has similar earnings history making it worthwhile to switch to their own record later. After April 29, 2016, only those who are at least age 62 by January 1, 2016, are grandfathered in and can file a restricted application once they later reach full retirement age. Again, to be eligible for spousal benefits, you have to be at least age 66 at the time and the other spouse must already be collecting or did a file-and-suspend by April 29. Therefore, it will depend on the ages of both spouses as to whether this method makes sense or is available. If you are grandfathered in and your spouse will be collecting by the time you reach age 66, then you’ll be all set. If your spouse won’t yet be collecting at the time, but will be over age 66 themselves, then your spouse should file and suspend by April 29 to leave this strategy open for you.
The Social Security Administration and Congress never meant for the policy changes over the years to create these loopholes. This law change is intended to better secure the resources of the Social Security program.
During this transition period, it is worthwhile to consider your options. After April 29, there will still be decisions to be made on when to collect Social Security. Cindi Turoski is a managing member of Bonadio Wealth Advisors based out of our Albany, NY office.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
