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Social Security Loopholes Ending

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Two Social Security loopholes that have boosted benefits for more than 100,000 married couples are disappearing. But for some people, there still is time to take advantage.

The recently enacted federal budget deal includes new Social Security rules that end the strategies known as “file and suspend” and “restricted application.” These strategies often net couples tens of thousands of dollars in extra benefits. Examples of how the strategies have worked over the past 15 years…

File and suspend: A husband (it could be a wife) who has reached “full” retirement age (that’s 66 if he was born between 1943 and 1954) files for Social Security benefits but then immediately “suspends” them. His wife then files a claim to start collecting spousal benefits that are available only if her husband has filed for benefits—which he has. The benefits she collects, based on his past earnings record, are typically 50% of what his full-retirement age benefits would have been. Meanwhile, because his benefits are suspended, the size of his future benefits continues to grow by 8% a year as though he had never filed for benefits. The husband unsuspends his benefits at age 70, when they stop growing (or sooner if he wishes).

New rule: Spousal benefits (in this example, what the wife applies for) will not be paid as long as the husband’s benefits are suspended.

Restricted application: The husband (it could be the wife) files for benefits after reaching full retirement age. His wife then files a “restricted ­application” for benefits based on his earnings record. Meanwhile, her potential future benefits based on her earnings history continue to grow—that’s the loophole. Eventually she switches from the spousal benefits to her own benefits.

New rule: If a spouse (say, it is a wife) files for benefits based on her husband’s earnings record, she is “deemed” to have applied for her own benefits, too, so she can’t delay hers and let them continue to grow.

What This Means to You

The new rules, details of which were still subject to change at press time, will not block everyone from using the two strategies. How the rules apply…

If you have already filed a claim for spousal benefits based on your spouse’s earnings history and your spouse has suspended his/her benefits, you are grandfathered into the file-and-suspend strategy, so you can continue to receive spousal benefits.

If you will be at least 66 by April 29, 2016—180 days after the bill was signed—you likely will still be able to initiate the file-and-suspend strategy if you do so by that date.

If you will be at least 62 by the end of 2015, you still will be able to file a restricted application for benefits based on your spouse’s earnings, no matter when you file, even years from now.

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Source: Michael ­Kitces, CFP, director of planning research for Pinnacle Advisory Group, a wealth-management firm based in Columbia, Maryland. He is publisher of the ­financial-planning blog Nerd’s Eye View at Kitces.com. Date: December 1, 2015 Publication: Bottom Line Personal