You don’t know what you’ve got till it’s gone …
In less than three months, we’ll have a new president. But November 2016 will also mark the one-year anniversary of the Bipartisan Budget Act of 2016. This little piece of legislation will forever be infamous for gutting precious Social Security strategies for married retirees. Amazingly, very few Baby Boomers are even aware of these changes. Let’s review the carnage:
This strategy required a person of Full Retirement Age (FRA) to file for benefits but immediately suspend payment. Being suspended, the monthly benefit would earn delayed retirement credits of 8% per year between ages 62 and 70. More importantly, the act of filing opened the door for a spouse to file for spousal benefits.
Whether by suspending or turning on benefits, a person made it possible for their spouse to claim a spousal benefit with a Restricted Application. Spousal benefits are calculated as half of your spouse’s FRA benefit. The Restricted Application, being that it engages spousal benefits only, has the ancillary benefit of leaving your own FRA benefit to accrue those 8% annual increases.
The Old Advantages
Suspending benefits until age 70, especially for the higher income earning spouse, was a great way to maximize both living and survivorship income.
The Restricted Application was an excellent tool to use when the higher income earning spouse was younger. By filing the Restricted Application, that person could collect a spousal benefit while allowing their own benefit to max out by age 70.
The real magic occurred when using both strategies concurrently. By filing-and-suspending, one spouse could seek those maximum benefits while the other, using the Restricted Application, could also seek to maximize their own benefit but collect a spousal benefit in the interim. Whether using the two strategies together or either one on a standalone basis, it wasn’t uncommon for a married couple to increase their long-term Social Security benefits by 10-30%. That’s big money … sometimes equating to tens or hundreds of thousands of dollars.
What You’ve Lost
File-and-suspend is dead for marital strategizing. The new rules stipulate that when benefits are suspended, so too is the ability to put any other claim against that record. The only exception is for those who grandfathered themselves by filing-and-suspending prior to the deadline of April 30, 2016.
The Restricted Application has also changed. Going forward, when filing a Restricted Application, a person is deemed to be applying for all eligible benefits. So the Social Security Administration compares your own benefit against your spousal benefit and pays whichever is greater. No more switching around and earning those 8% credits. But there’s one exception! If you achieved age 62 prior to 2016, you can still file a Restricted Application, exercise choice between available options and switch between them over time to maximize benefits.
Are there any strategies left that can help maximize Social Security?
Absolutely! While marital switching strategies may be dead, Social Security planning most definitely is not. Rather than lament our losses, let’s instead focus on what else can be done to maximize your benefits:
Know the best time to turn on benefits. Single people have it easy; they can just turn on their benefit whenever they’re ready. But it’s more complicated for married couples. Everyone is able to collect between the ages of 62 and 70. That’s nine different years. Since each spouse can collect in any of those nine years, a married couple actually has 81 age combinations for engaging Social Security.
Knowing which of the 81 options is best for you depends on your work ambitions, retirement goals and difference in age. A good financial planner will help you figure this out.
Beware of penalties. The majority of Americans turn on Social Security at age 62, but collecting prior to FRA can be perilous due to the earnings limit. In 2016, that limit is $15,720 and your Social Security is reduced by $1 for every $2 earned in excess. Example: A 64-year-old earning $40,000 would lose $12,140 in benefits ($40,000-$15,720)-;-2=$12,140). A separate, more generous earning limit is applied in the year you achieve FRA.
Avoid taxes if possible. Your Social Security benefits may be taxed depending on the household’s total Modified Adjusted Gross Income (MAGI). An individual tax return with MAGI between $25,000 and $34,000 will see 50% of their Social Security taxed. The taxable amount increases to 85% for MAGI over $34,000. A married couple’s joint return is in the 50% tier for MAGI of $32,000 to $44,000 and in the 85% tier when it exceeds $44,000.
Confused? Don’t be embarrassed. These rules are not easy to follow. What makes things worse is that the Social Security Administration is prohibited from giving advice. They will only confirm your benefits and provide general information. We’re here to help. Use our website to request a free Social Security report or reserve a seat at one of our upcoming retirement seminars.
Information provided should not be considered as tax advice from Arcadia Financial Group, LLC or its representatives. Please consult with your tax professional.