You may have heard recently that certain Social Security claiming strategies will no longer be available. Part of the Bipartisan Budget Act of 2015 called for closing the “loopholes” on the file-and-suspend strategies frequently used by retirees. These changes will significantly impact the filing strategies available to those who are not of full retirement age (FRA) by April of next year and those who do not reach age 62 by the end of 2015.
Under the current law, individuals are allowed to “file” for social security benefits and then immediately “suspend” benefits, allowing their social security benefit to continue to grow until age 70 (see our blog from last year “Don’t Claim Social Security Without Talking to Your Advisor” for information about why waiting till 70 to start benefits can pay off). This file-and-suspend strategy allows the spouse to file for half of their spouse’s retirement benefit, known as filing a restricted application for spousal benefits only. At age 70, the spouse would then switch to his or her own higher benefit. Using this strategy, the couple could both get their highest benefits at age 70, yet collect a spousal benefit earlier. The loss of this strategy is estimated to cost $60,000 of additional social security benefits for the couples who would have implemented it.
The file-and-suspend strategy is an unintended loophole that emerged from the Senior Citizens Freedom to Work Act in 2000, which initiated the concept of “voluntary suspension.” Now Congress is closing this loophole for future retirees. I say “future” because those who are currently of full retirement age and are using this strategy will not be affected. There is also a six-month window of opportunity for those who are FRA (or will be soon) to still file and suspend their benefits, allowing their spouse to file restricted applications.
For those over age 62, a restricted application is still available at FRA, BUT only if your spouse has filed to collect benefits. In other words, your spouse cannot suspend their benefits to allow you to receive a spousal benefit. He or she will have to actually start collecting their benefit. For those under age 62, the restricted application will no longer be an option.
These changes are affecting the claiming strategies that we are recommending for our clients. The Budget Act, as it currently stands, will also affect the benefits for divorced spouses and dependent children. Surviving spouses will not be affected. This is a good time to review your claiming strategy and make sure that it is still the best strategy for you under the new legislation. If you have questions navigating the new rules, we can assist you with determining your optimal strategy.
Kim Butler, CFP®
Associate Financial Planner