Social Security law is infamously complex, especially for those in the retirement planning business. Two-income couples, for example, who were born several years apart, now face an utterly byzantine set of regulations when trying to select the best time to file for benefits, whether to accept spousal benefits, or whether to delay their own social security payout.
A Few Basic Rules of the Game
Social Security refers to early retirement, full retirement age, and delayed retirement. Typically, these mileposts occur at age 62, 65 or 66, and 70. The big advantage of delaying is that the benefit amount can be as much as one-third higher than if a person opted into the system at age 62 or 65. Social Security law refers to this advantage as “delayed retirement credits.” For healthy people who can live reasonably well without social security income, waiting until age 70 to receive benefits is almost always a smart decision.
When one spouse applies for benefits at early, full or delayed retirement age, the spouse, even if that person has never worked, receives a “spousal benefit” that can be as much as 50 percent of the primary wage-earner’s amount.
For single people, the rules are relatively simple because they simply decide whether to take benefits at age 62 or sometime after that up until age 70.
The Reset Provision
There is also a so-called “reset” provision that is available for anyone who regrets taking early benefits. Technically called a “Request for Withdrawal of Application” on Social Security Form 521, the RWA lets anyone “come out of retirement” so to speak, and repay any benefits received before age 70 (in bare dollars, with no adjustment for inflation or interest) and immediately opt back INTO the system at their current age.
The RWA sounds either too complicated or unwise, but it is sometimes a very good retirement strategy. For example, for someone who took benefits at age 62, for example, and four years later decides to repay all 48 months of benefit checks, the new monthly amount might be much higher. In addition, that new, much higher benefit amount will never go down.
The New Laws Change (almost) Everything
The 2000 the Senior Citizens’ Freedom to Work Act is ancient history. The new operational law for retirement planning emanates from the much more restrictive (for retirees anyway, who so loved the “freedom” of the 2000 law) Bipartisan Budget Act of 2015. Even in the hermetic world of tax and estate planning, whenever a law contains the word “bipartisan,” that usually portends the government getting more of your money and you getting less of it.
In any case, the Freedom to Work Act contained two key provisions that the Bipartisan Budget Act removes, effectively shutting down a pair of very lucrative, and legal, retirement planning tools.
The big picture of what happened is this: President Obama learned that tax attorneys and CPAs were advising their clients to, horror of horrors, maximize their LEGAL social security income based on the Social Security Administration’s own rules and on the 2000 Freedom to Work Act. He encouraged the SSA to issue new provisions, without warning or public discussion, based on complicated language in the 2015 Act.
Bottom line: As of now, two of the best retirement planning strategies are no longer available for most people born after 1954, give or take a year or two depending on the specific strategy. Here is a quick rundown of the old Social Security rules, how they were used, and who can and cannot use them based on the new law.
Note: The reset provision, RWA (Request for Withdrawal of Application), is still on the table for anyone who wants to use it. Until another law is written to supersede the 2015 Bipartisan Budget Act, anyone who wants to opt out of “early retirement” and opt back into the system for higher benefits later on can do so. Actually, it is quite surprising that the Obama administration did not try to eliminate RWA, based on the president’s distaste for those who would “… manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.” {Translation: The elderly can be especially sneaky when it comes to preserving the money they earned by the sweat of their brow. The Federal Government can and will take all possible action to minimize income of retirees}.
The New Rules for “File-and-Suspend” (FAS)
What it was: The FAS allowed Person A in a couple, who had reached full retirement, to file for social security benefits. The spouse, Person B, would then get 50 percent of that benefit amount as a “spousal” payment. At that point, Person A would then request to stop receiving benefits until reaching the age of 70. Person A’s benefits were then suspended so he/she could earn “delayed retirement credits” that amount to about 8 percent per year. However, Person B would continue to receive the spousal benefit check each month.
Who can still use it: SSA has attempted to grandfather the strategy out of existence by allowing some people who are already doing it to continue, and even letting those born before May 1, 1950 to adopt the strategy if they wish. However, all those youngsters born May 1, 1950 or after are out of luck. They cannot use the file-and-suspend strategy, forevermore.
There is a related planning technique that has also been disallowed. No longer can someone who suspends benefits later “change their mind” and claim retroactive payments “as if” they had retired at the earlier date. Someone who used file-and-suspend at age 66 could, perhaps two years later due to a financial emergency, request a lump-sum payout of the two-years’ worth of prior benefits that had been suspended. They would lose their “delayed retirement credits” but get a nice chunk of money in a pinch. Not anymore.
The New Rules for the “Restricted Application” (RA)
What it was: This one is a bit more complicated than the FAS. Under the old law, Person A of a couple could, between age 62 and full retirement age, apply for a spousal benefit OR a retirement benefit. Under the new law, that person MUST accept whichever is the greater amount, the spousal benefit or the retirement benefit.
At full retirement, it was okay to delay one’s own social security application until age 70. That way, Person A was able to receive a benefit check while simultaneously earning delayed retirement credits. Now, the SSA will force a retiree to decide between spousal benefits or retirement benefits. There will no longer be an ability to receive spousal benefits while building delayed retirement credits.
Who can still use it: SSA has allowed very limited use of the RA, or restricted application, under the new law. First, an applicant must be at full retirement age to do it. Second, in order for a person at full retirement age to earn delayed retirement credits while receiving a spousal benefit, that person must have been born on or before Dec. 31, 53.
Keep an eye on the Social Security Administration’s website for further (or any) clarification on these topics. As of this writing, there is scant detail on the SSA site and there are still quite a few ambiguities with the new regulations, especially as to exact birthdates of persons who still can or can no longer use various strategies. Even CPAs and tax attorneys are in the dark about the new rules because they typically use the SSA site as a main source of information, and that well is currently very, very dry.
And because all these regulations are in flux and being tossed about like the political football they are, be certain not to rely on this article for tax, estate or retirement planning. We’re just doing our best to figure this all out like everyone else is, so take our information as a starting point for a discussion with your own tax or financial professional, who in any case knows your particular situation and can offer specific advice.
Mike McVay, Accountant - 850-725-5696 Mike@MikeMcVay.com
A Few Basic Rules of the Game
Social Security refers to early retirement, full retirement age, and delayed retirement. Typically, these mileposts occur at age 62, 65 or 66, and 70. The big advantage of delaying is that the benefit amount can be as much as one-third higher than if a person opted into the system at age 62 or 65. Social Security law refers to this advantage as “delayed retirement credits.” For healthy people who can live reasonably well without social security income, waiting until age 70 to receive benefits is almost always a smart decision.
When one spouse applies for benefits at early, full or delayed retirement age, the spouse, even if that person has never worked, receives a “spousal benefit” that can be as much as 50 percent of the primary wage-earner’s amount.
For single people, the rules are relatively simple because they simply decide whether to take benefits at age 62 or sometime after that up until age 70.
The Reset Provision
There is also a so-called “reset” provision that is available for anyone who regrets taking early benefits. Technically called a “Request for Withdrawal of Application” on Social Security Form 521, the RWA lets anyone “come out of retirement” so to speak, and repay any benefits received before age 70 (in bare dollars, with no adjustment for inflation or interest) and immediately opt back INTO the system at their current age.
The RWA sounds either too complicated or unwise, but it is sometimes a very good retirement strategy. For example, for someone who took benefits at age 62, for example, and four years later decides to repay all 48 months of benefit checks, the new monthly amount might be much higher. In addition, that new, much higher benefit amount will never go down.
The New Laws Change (almost) Everything
The 2000 the Senior Citizens’ Freedom to Work Act is ancient history. The new operational law for retirement planning emanates from the much more restrictive (for retirees anyway, who so loved the “freedom” of the 2000 law) Bipartisan Budget Act of 2015. Even in the hermetic world of tax and estate planning, whenever a law contains the word “bipartisan,” that usually portends the government getting more of your money and you getting less of it.
In any case, the Freedom to Work Act contained two key provisions that the Bipartisan Budget Act removes, effectively shutting down a pair of very lucrative, and legal, retirement planning tools.
The big picture of what happened is this: President Obama learned that tax attorneys and CPAs were advising their clients to, horror of horrors, maximize their LEGAL social security income based on the Social Security Administration’s own rules and on the 2000 Freedom to Work Act. He encouraged the SSA to issue new provisions, without warning or public discussion, based on complicated language in the 2015 Act.
Bottom line: As of now, two of the best retirement planning strategies are no longer available for most people born after 1954, give or take a year or two depending on the specific strategy. Here is a quick rundown of the old Social Security rules, how they were used, and who can and cannot use them based on the new law.
Note: The reset provision, RWA (Request for Withdrawal of Application), is still on the table for anyone who wants to use it. Until another law is written to supersede the 2015 Bipartisan Budget Act, anyone who wants to opt out of “early retirement” and opt back into the system for higher benefits later on can do so. Actually, it is quite surprising that the Obama administration did not try to eliminate RWA, based on the president’s distaste for those who would “… manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.” {Translation: The elderly can be especially sneaky when it comes to preserving the money they earned by the sweat of their brow. The Federal Government can and will take all possible action to minimize income of retirees}.
The New Rules for “File-and-Suspend” (FAS)
What it was: The FAS allowed Person A in a couple, who had reached full retirement, to file for social security benefits. The spouse, Person B, would then get 50 percent of that benefit amount as a “spousal” payment. At that point, Person A would then request to stop receiving benefits until reaching the age of 70. Person A’s benefits were then suspended so he/she could earn “delayed retirement credits” that amount to about 8 percent per year. However, Person B would continue to receive the spousal benefit check each month.
Who can still use it: SSA has attempted to grandfather the strategy out of existence by allowing some people who are already doing it to continue, and even letting those born before May 1, 1950 to adopt the strategy if they wish. However, all those youngsters born May 1, 1950 or after are out of luck. They cannot use the file-and-suspend strategy, forevermore.
There is a related planning technique that has also been disallowed. No longer can someone who suspends benefits later “change their mind” and claim retroactive payments “as if” they had retired at the earlier date. Someone who used file-and-suspend at age 66 could, perhaps two years later due to a financial emergency, request a lump-sum payout of the two-years’ worth of prior benefits that had been suspended. They would lose their “delayed retirement credits” but get a nice chunk of money in a pinch. Not anymore.
The New Rules for the “Restricted Application” (RA)
What it was: This one is a bit more complicated than the FAS. Under the old law, Person A of a couple could, between age 62 and full retirement age, apply for a spousal benefit OR a retirement benefit. Under the new law, that person MUST accept whichever is the greater amount, the spousal benefit or the retirement benefit.
At full retirement, it was okay to delay one’s own social security application until age 70. That way, Person A was able to receive a benefit check while simultaneously earning delayed retirement credits. Now, the SSA will force a retiree to decide between spousal benefits or retirement benefits. There will no longer be an ability to receive spousal benefits while building delayed retirement credits.
Who can still use it: SSA has allowed very limited use of the RA, or restricted application, under the new law. First, an applicant must be at full retirement age to do it. Second, in order for a person at full retirement age to earn delayed retirement credits while receiving a spousal benefit, that person must have been born on or before Dec. 31, 53.
Keep an eye on the Social Security Administration’s website for further (or any) clarification on these topics. As of this writing, there is scant detail on the SSA site and there are still quite a few ambiguities with the new regulations, especially as to exact birthdates of persons who still can or can no longer use various strategies. Even CPAs and tax attorneys are in the dark about the new rules because they typically use the SSA site as a main source of information, and that well is currently very, very dry.
And because all these regulations are in flux and being tossed about like the political football they are, be certain not to rely on this article for tax, estate or retirement planning. We’re just doing our best to figure this all out like everyone else is, so take our information as a starting point for a discussion with your own tax or financial professional, who in any case knows your particular situation and can offer specific advice.
Mike McVay, Accountant - 850-725-5696 Mike@MikeMcVay.com
