Social Security Loophole That Lets Couples Maximize Benefits Closes in April

February 17, 2016
Staff Report

Consider "filing and suspending" now to get current income while future payments grow.

The deadline for married couples and some divorcees to have their social security cake and eat it too is April 30, 2016. After that, couples won’t be able to maximize their benefits using the “file and suspend” strategy, as the Bipartisan Budget Act of 2015 will eliminate this valuable loophole.

“Learn about and weigh your options now,” says Laurie Samay, a certified financial planner and portfolio manager with Palisades Hudson Financial Group. “Don’t wait until late March. It can take more than a month to get an appointment with your local social security office.”

The “file and suspend” technique has two parts: one spouse filing for and suspending his or her retirement benefits, with the other filing a restricted application for spousal benefits. It’s the only way for a couple to tap into benefits early without decreasing either spouse’s ultimate monthly retirement benefit.

“It’s basically free money,” she says.

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. “If you expect to live to a ripe old age, it can pay handsomely to wait,” Samay points out.

The loophole set to expire lets eligible couples do a partial end run around those rules. Here’s how it works, according to Samay.

The higher-earning spouse files for retirement benefits with the Social Security Administration, but “suspends” those benefits until a later point in time, up until age 70. Simultaneously, the lower-earning spouse files a restricted application for spousal benefits, for up to 50% of the higher earner’s benefit amount. (If the other spouse hasn’t filed and suspended benefits, there’s no spousal benefit to collect.)

In the meantime, the higher earner’s monthly retirement benefits continue to grow until the individual reactivates them. The lower earner’s monthly retirement benefits, on his or her own record, also continue to grow.

Here’s an example. 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 FRA 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.

You must turn 66 and file and suspend by April 30 in order to employ the strategy. 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 by Jan. 1, 2016 to file a restricted application for spousal benefits. The new rules eliminate the restricted application for everyone else. These individuals will receive the greater of their own retirement benefits or the spousal benefits to which they are entitled when they apply.

Samay offers another alternative for those who need more current income, but may miss the April 30 deadline. The lower-earning spouse can 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 or she can switch to benefits based on his or her own record, which will have increased over time. However, the lower-earning spouse will not have accrued additional credits, Samay notes. The higher-earning spouse must turn 62 by Jan. 1, 2016 to employ this strategy.

“This strategy will provide current income for the couple, as well as the same survivor benefits for the lower-earning spouse as the file and suspend strategy, since the higher-earning spouse can continue to accrue additional credits on his or her own record,” Samay says.

Filing a restricted application never reduces the benefit amount on one’s own record.

Divorcees Too

If you’re divorced and your marriage lasted 10 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 turns 62 by Jan. 1, 2016. Otherwise, the divorcee will receive the greater of his or her own retirement benefits and the spousal benefits to which he or she is entitled, with no additional credit accrual.

“If you continue to be eligible for these strategies, you should educate yourself and make an informed decision about implementing any social security 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.”

Palisades Hudson is a fee-only financial planning firm and investment manager based in Scarsdale, N.Y., with more than $1.2 billion under management. Branch offices are in Atlanta, Fort Lauderdale, FL, and Portland, OR. Read Palisades Hudson’s daily column on personal finance, economics and other topics at http://palisadeshudson.com/current-commentary. Twitter: @palisadeshudson.