Major changes have come to Social Security retirement benefits and now is the time to check in to see how these changes may affect your plans. The Bipartisan Budget Act of 2015, signed into law November 2, 2015, effectively eliminated two highly-discussed Social Security claiming strategies: file and suspend and file restricted. These two strategies have gained in popularity by married couples as a way to increase lifetime Social Security income. These two strategies were first unintentionally introduced back in 2000 as part of The Senior Citizens freedom to Work Act and were considered to be loopholes” in Social Security.
A small number of people have been grandfathered and are not impacted by the new law: Those who are already receiving benefits are not impacted and people who turn 66-years old before April 20, 2016, can still file and suspend benefits; but it must be done by April 30, 2016. Additionally, the file and restricted strategy continues to be available to those age 62 years of age or older by December 31, 2015.
As for the rest of us, we are no longer able to benefit from these strategies and also need to be aware of some other changes that were part of the Bipartisan Budget Act. The complexity surrounding these changes can be a daunting task to explain, therefore, I’ll use examples to try to clarify.
File and Suspend – Old Rules
The idea behind file and suspend was to permit one spouse at full retirement age (65-67), usually the higher earning spouse, to file for retirement benefits only to suspend them. Once suspended, the other spouse would then file for, and receive spousal benefits. While all this is going on, the higher earning spouse is earning 8% while waiting until age 70 (delayed retirement) to begin receiving monthly social security benefits. This results in the higher earning spouse getting a 132% increase in social security benefits at age 70.
File and Suspend – New Rules
Under the new rules, when the higher earning spouse suspends his benefits, he will also suspend any benefits payable to his spouse or children.
File Restricted – Old Rules
A restricted application allowed individuals to get spousal benefits while delaying their own Social Security retirement benefit. This strategy let their own benefit grow from full retirement age (65-67) to delayed retirement age (70) with the 8% delayed retirement benefits. For example, Jim and Mary are both 60, when they reach their full retirement age under Social Security Jim expects to receive $25,000 a year while Mary expects $20,000. Mary claims her benefit first and Jim files a restricted application to receive spousal benefits from Mary in the amount of $10,000. Jim’s benefit continues to grow and at age 70 he will begin to receive his own monthly benefits from Social Security.
File Restricted – New Rules
Under the new rules, a spouse born in 1954 or later who files for Social Security will be deemed to have files for both their own and spousal benefits, and will receive whichever benefit is higher. In effect, it kills the strategy.
Widow / Widower Benefits
Surviving spouses are not impacted by the tax law change. The survivor is eligible for a widow or widower’s benefit equal to 100% of the deceased spouse’s benefit. The rule also applies to a divorcee whose former spouse has died, as long as the couple was married for at least 10 years, and the divorcee remains unmarried until age 60.
Divorced Benefits – Old Rules
An ex-spouse who has been married for 10 years can collect a benefit based on the former spouse’s work record even if he or she is not collecting benefits. However, that ex-spouse must be more than 62 years old.
Divorced Benefits – New Rules
Under the new rules, divorced spouses who are younger than 62, before December 31, 2015 will not be able to collect spousal benefits only while their own retirement benefits continue to grow up to age 70. Now, when the divorcee makes a claim they either receive their own benefit or a spousal benefit, whichever is higher.
While the new law has tightened up ways for us to exploit Social security, many retirees still have opportunity to bring value to using Social Security while planning for retirement. For most retirees, it still pays to delay Social Security benefits. Individuals who wait receive the 8% per year delayed retirement credits from their Full Retirement Age until age 70. For many, they will need to increase their Social Security benefits and tap into other financial resources (TSP, Savings, Investments) to fill in the retirement funding gap.
A small number of people have been grandfathered and are not impacted by the new law: Those who are already receiving benefits are not impacted and people who turn 66-years old before April 20, 2016, can still file and suspend benefits; but it must be done by April 30, 2016. Additionally, the file and restricted strategy continues to be available to those age 62 years of age or older by December 31, 2015.
As for the rest of us, we are no longer able to benefit from these strategies and also need to be aware of some other changes that were part of the Bipartisan Budget Act. The complexity surrounding these changes can be a daunting task to explain, therefore, I’ll use examples to try to clarify.
File and Suspend – Old Rules
The idea behind file and suspend was to permit one spouse at full retirement age (65-67), usually the higher earning spouse, to file for retirement benefits only to suspend them. Once suspended, the other spouse would then file for, and receive spousal benefits. While all this is going on, the higher earning spouse is earning 8% while waiting until age 70 (delayed retirement) to begin receiving monthly social security benefits. This results in the higher earning spouse getting a 132% increase in social security benefits at age 70.
File and Suspend – New Rules
Under the new rules, when the higher earning spouse suspends his benefits, he will also suspend any benefits payable to his spouse or children.
File Restricted – Old Rules
A restricted application allowed individuals to get spousal benefits while delaying their own Social Security retirement benefit. This strategy let their own benefit grow from full retirement age (65-67) to delayed retirement age (70) with the 8% delayed retirement benefits. For example, Jim and Mary are both 60, when they reach their full retirement age under Social Security Jim expects to receive $25,000 a year while Mary expects $20,000. Mary claims her benefit first and Jim files a restricted application to receive spousal benefits from Mary in the amount of $10,000. Jim’s benefit continues to grow and at age 70 he will begin to receive his own monthly benefits from Social Security.
File Restricted – New Rules
Under the new rules, a spouse born in 1954 or later who files for Social Security will be deemed to have files for both their own and spousal benefits, and will receive whichever benefit is higher. In effect, it kills the strategy.
Widow / Widower Benefits
Surviving spouses are not impacted by the tax law change. The survivor is eligible for a widow or widower’s benefit equal to 100% of the deceased spouse’s benefit. The rule also applies to a divorcee whose former spouse has died, as long as the couple was married for at least 10 years, and the divorcee remains unmarried until age 60.
Divorced Benefits – Old Rules
An ex-spouse who has been married for 10 years can collect a benefit based on the former spouse’s work record even if he or she is not collecting benefits. However, that ex-spouse must be more than 62 years old.
Divorced Benefits – New Rules
Under the new rules, divorced spouses who are younger than 62, before December 31, 2015 will not be able to collect spousal benefits only while their own retirement benefits continue to grow up to age 70. Now, when the divorcee makes a claim they either receive their own benefit or a spousal benefit, whichever is higher.
While the new law has tightened up ways for us to exploit Social security, many retirees still have opportunity to bring value to using Social Security while planning for retirement. For most retirees, it still pays to delay Social Security benefits. Individuals who wait receive the 8% per year delayed retirement credits from their Full Retirement Age until age 70. For many, they will need to increase their Social Security benefits and tap into other financial resources (TSP, Savings, Investments) to fill in the retirement funding gap.