For most people, navigating all the complexities of Social Security can be confusing. Do you wait until you’re at full retirement age (FRA) to take your distributions? Or do you decide to postpone until age 70 to maximize your benefits?
On the other hand, do you file and suspend to allow you or your spouse to collect a larger benefit at a later time? It’s not a decision to be taken lightly. And it needs to be made as soon as April 29, 2016, when the Bipartisan Budget Act of 2015 will close this so-called Social Security loophole.
Married couples with at least one working spouse who has contributed to Social Security through payroll taxes—or those who were married for at least a decade and now divorced—generally choose to exercise the file and suspend option. The maximum amount the spouse will receive is 50% of the working spouse’s primary benefit amount—the monthly income he or she is eligible to receive at FRA.
Here’s How it Works
With file and suspend, the older spouse claims benefits at the current FRA of 66 and then immediately suspends his or her benefits. Then the younger spouse, who must be above age 62, can claim spousal benefits to defer his or her own benefits until FRA.
But wait…there’s more:
When the older spouse is 70, he or she can claim Social Security benefits that will have grown to the maximum amount, and the younger spouse can collect the larger of his or her own benefit or spousal benefit.
The advantage is that the spouse who suspends earns 8% each year as an additional Social Security benefit credit.
The downside is that if you file for a spousal benefit before your FRA, the Social Security Administration (SSA) can reduce your benefit by up to 30 percent, depending on how early you file a claim.
File and Suspend Example: Jim and Jane Banks
Let’s take a hypothetical situation of spouses Jane and Jim Banks. Jane worked before taking time off to raise their three kids and then re-entered the workforce on a part-time basis afterward. So Jane will receive at age 66 approximately $800 a month in Social Security benefits.
Jim, who has been working longer and has had a record of higher earnings, projects to receive $2,000 a month in Social Security benefits if he suspends and waits until age 70. According to SSA calculations, half of his benefit would be $1,000 a month in spousal distributions.
So if Jane claims a spousal benefit, she will receive $1,000 per month in income, based on Jim’s Social Security contributions. Had she filed based upon her own earning records she would have received only $800 per month.
Is File and Suspend Right for You?
It’s a complex decision and one that—like most financial planning strategies—is dependent upon your own situation and goals. Are both spouses still working, or have other sources of income? Or will they need to depend on receiving Social Security benefits earlier than their FRA?
The new law will only affect you if you file and suspend on or after April 30, 2016. If you’ve chosen to voluntarily suspend before that date, the new law will not affect you. Additionally, if you suspend before April 30, if your spouse or children become entitled to benefits, they will not be impacted by the new rules and will continue to receive their Social Security benefits.
Some people recommend acting right away, while others think it’s wise to take a wait-and-see approach.
At JJ Burns & Company, part of our planning process is to help you understand how to best maximize your Social Security options depending on your situation. Contact us today to see if the file and suspend strategy is right for you.
JJ Burns was interviewed by Tara Lynn Wagner of Time Warner Cable News about the end to a popular Social Security claiming strategy. Lawmakers have set the date for the termination of what's commonly called "file and suspend." It is a way for one spouse to start receiving payments—while also growing their benefit. Watch JJ explain how the strategy works and when it will no longer be available.
Watch the full interview here
The decline in investors' retirement funds during the economic downturn has made everyone less certain about their future. Now that we've had some time to replenish savings, it's a good time to think about the role Social Security plays in retirement income. It's never too early to plan properly to maximize your benefits.
For many of us, we’ve worked since we were teenagers—at a movie theater, grocery store, restaurant or in a family business. Then we went on to develop careers. All the while contributing to the Social Security system. Still, Social Security remains a bit of a financial mystery for most people.
Here are four main issues to understand about Social Security—and how not to make the most common mistakes:
Mistake #1: Not recognizing how much you may receive. The good news is you may receive more than you anticipated from Social Security. You can receive an annual statement of benefits and plan your benefits here.
Mistake #2: Taking your Social Security benefits too early. “Full retirement age” is an important term. If you were born in 1954 or before, the full retirement age is 66 years old; it gradually rises to 67 for those born after. Of course, you can still work and collect Social Security no matter what your age. However, in the year you reach full retirement age, the government deducts $1 in benefits for every $3 you earn above the limit ($41,880 in 2015).
Mistake #3: Misunderstanding how Social Security can affect you (and your spouse). Whether you are still married, divorced or widowed, you may be entitled to Social Security benefits that are based on:
Your own earnings record;
A spouse or ex-spouse’s earnings record;
A deceased spouse’s or deceased ex-spouse’s earnings record; or
Whether you are disabled.
It’s complicated to say the least given the wide range of relationships and situations that people experience—coupled with the fact that laws regularly change.
There’s a strategy called “file and suspend” that you can use if you have reached full retirement age, but are not yet age 70. You can ask Social Security to suspend your retirement benefit payments. This way you can receive delayed retirement credits, which can increase your benefits from 5.5 percent to 8 percent per year depending upon when you were born.
Another tactic is to use the “restricted application.” If you are married, or eligible for a benefit on an ex-spouse’s record, once you have reached full retirement age but have not yet claimed your Social Security benefits, you can use the restricted application to claim a spousal benefit. This allows your own benefits to continue to grow up to age 70.
Or, you can combine both strategies. If you and your spouse are of full retirement age, but one wants to work until age 70, a spouse can file for retirement benefits now and have the payments suspended, while the other files a restricted application for only the spousal benefits. This strategy allows both of you to delay receiving Social Security benefits on your own records so you can earn delayed retirement credits. Note that the IRS requires that, in order to file for spousal benefits, the other spouse must have established a filing date.
Because everyone’s situation is different, we suggest that you consult a qualified advisor to help you plan your Social Security strategy.
Mistake #4: Not realizing how Social Security may impact your taxes. In a perfect world, being eligible for Social Security would exempt you from taxes. Think again. Some people may have to pay federal income taxes on their Social Security benefits if they have qualifying income, such as wages, self-employment, interest, dividends and other taxable income.
What’s important to know is that you can lose up to 85 percent of your Social Security benefits if you don’t plan ahead. It’s called the “tax torpedo,” and it can eat up a significant portion of your hard-earned money.
You don’t have to be making a substantial income to be subjected to this tax torpedo – even those with modest incomes can take the hit. Once a low-income threshold is met ($25,000 for singles and $32,000 for married couples), up to 50 percent of Social Security benefits will be taxed. At a second threshold ($34,000 for singles and $44,000 for married couples), up to 85 percent of Social Security benefits will become taxable.
Depending on your situation, there’s a high likelihood that your Social Security benefits will be taxed. However, delaying your Social Security benefits may help avoid the tax torpedo. You will also gain from building a substantially larger Social Security fund for yourself, as well as your spouse. This may mean relying more heavily on your retirement investments, though. A qualified financial advisor can help you determine how taxes may impact your Social Security benefits and when is the best time to take them.
We’ve all paid into Social Security and it can be a substantial income resource in your retirement years. You can choose to live off the proceeds, invest your Social Security income, or help fund an educational or other type of trust. Navigating the Social Security landscape—in addition to your other investments—can be a challenge, but with proper financial planning it doesn’t have to be.