By James Lange
A certain provision buried in the fine print of the Bipartisan Budget Act of 2015 may have a profound impact on the benefits that married senior citizens are eligible to receive from Social Security. If eligible couples do not act by April 29, they may lose a significant amount of income from options that they will not be able to take advantage of after that date.
The budget act eliminated two strategies, referred to as “unintentional loopholes,” that some of your married clients might be able to take advantage of in order to maximize their Social Security income. The first, called apply and suspend, allows them to file an application for benefits at age 66 (or later) and then suspend them – meaning that they do not receive monthly checks. For each year that the benefit remains suspended, it grows by 8 percent (up to a maximum of 32 percent), plus cost of living adjustments every year. When they finally begin collecting checks at age 70, those payments are significantly higher than they would have been if the recipients had collected them at age 66 - and they stay that way for the rest of your clients’ lives.
Here’s the reason that this strategy is called a “loophole.” Assume that you are advising a couple who has just retired, and that the husband has earned more money than his wife over their lifetimes. If the husband applies for and suspends benefits by April 29, 2016, his lower earning spouse can still apply for and receive spousal benefits that can be as high as 50 percent of what the husband would have received at age 66. If she does apply for spousal benefits, the family will still receive some income from Social Security during the years that the husband’s benefit is suspended.
The spouse will be eligible to apply for spousal benefits as soon as she is 62. Generally, the spouse should consider applying for spousal benefits unless she has earned more than her husband, and her own benefit amount is higher than the spousal benefit that she is entitled to.
What if the husband changes his mind and wants to start receiving his checks after he has suspended them? No problem! He can change his mind at any time, and the benefit amount that he will receive at that time will still be higher than if he had collected at 66. So if your clients do not need the income, there’s no reason to not take advantage of this strategy.
Here are some points that clients need to know in order to take advantage of the apply and suspend strategy. They must be legally married, and the higher earner must apply for and suspend his own benefit by April 29, 2016. After that date, the new rules apply. The husband can still apply for and suspend his benefit so that it will grow by 8 percent every year, but his wife will not be allowed to collect a spousal benefit at the same time.
As of this writing, the Social Security Administration has not clarified their final requirement, which was initially thought to be that the higher earner must be at least 66 by April 29, 2016. After the legislation was passed, several Social Security experts pointed out that retirees are allowed to apply for benefits up to four months in advance of the date that they want their benefits to start. Does this mean that individuals who will not be 66 until August of 2016, can apply and suspend by April 29, 2016 so that their spouse can collect spousal benefits? As of this writing, there has been no answer, so we are encouraging all affected clients to at least try to do so.
If the apply and suspend strategy won’t benefit your clients, then you might want to have them investigate the other “loophole” that is being eliminated. This one, called a restricted application for benefits, allows your client to file for benefits and specify that he only wants to receive whatever spousal benefit to which he might be entitled. What’s the point? Remember those 8 percent yearly increases (up to a maximum of 32 percent) that he can earn by not collecting his own benefit until age 70? Restricting his application to his spousal benefit allows your client to collect a check that, depending on his age, can be as high as 50 percent of his wife’s benefit - while at the same time allowing his own benefit to grow. When he turns 70, he can then switch to his own benefit if it is higher than his spousal benefit. This is generally thought of as being the more egregious “loophole,” because it allows eligible retirees to collect up to $60,000 of “free” Social Security benefits.
Fortunately, there is a longer period of time remaining to take advantage of this strategy. If your client was at least 62 years old as of December 31, 2015, he will be able to file a restricted application for benefits when he is eligible. In order to be eligible, your client must be full retirement age – which is 66 for those who will be able to take advantage of the strategy before it is eliminated. So if you have two different clients, one who happened to be 63 on December 31, 2015, and the other who happened to be 65 on that date, both can file restricted applications when they individually turn 66.
The options currently available to your clients for claiming Social Security benefits are complex, but have much in common with the options available to them when they are considering annuitizing an insurance contract. You should help your clients make those decisions with an important goal in mind – to protect the lower-earning spouse after death. If the higher earner dies first, you should make sure that the spouse will be eligible to receive a survivor’s benefit which, at maximum, will be as high as the higher earner’s own benefit amount.
Making smart decisions when it comes to Social Security elections can guarantee the surviving spouse as high a benefit as possible for the rest of his or her life, but two of the strategies that your clients can use to maximize your benefits are being eliminated. Talk to them now about their options, before it’s too late.
James Lange, certified public accountant and attorney, is a nationally recognized expert on individual retirement accounts and 401(k)s, as well as a best-selling author. He may be contacted at [email protected].
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