In November, President Obama signed into law a federal budget bill that will eliminate two popular filing strategies used by families to maximize their Social Security benefits. The strategies affected - known as file-and suspend and a restricted application - make it possible to maximize social security benefits and will only be available for the next 6 months.
File and Suspend
The first strategy, known as file and suspend, has enabled married individuals who have reached full retirement age to file for Social Security benefits - thus enabling their spouses to begin taking their spousal benefits - and then suspend the collection of those benefits to receive delayed retirement credits (an average of 8% per year) until age 70. (Full retirement age is the age at which an individual can retire and receive full Social Security benefits-age 66 for those born 1943-1954, the marker gradually rises to age 67 for younger individuals.)
Under the terms of the new law, individuals may continue to file for Social Security and suspend their benefits, but family benefits (i.e. spousal or dependent minor) can no longer be collected on a suspended benefit. The new law has different effects on two age groups:
People younger than age 66 on April 29, 2016: An individual's family benefits cannot be paid while the individual's own benefits are suspended. In order for a spouse or dependent to receive benefits based on a wage earner's record, that wage earner must be currently collecting his or her benefits.
People age 66-70 on April 29, 2016: An individual must suspend benefits by April 29, 2016 if he would like his spouse or dependent child to file for spousal or dependent child benefits while his benefit is suspended. This includes a younger spouse who will be able to file for spousal benefits in the future while his benefit remains suspended.
Filing a restricted application for spousal benefits has frequently been used by couples in combination with a file and suspend strategy, especially when two spouses are close in age and when one spouse's own individual benefit is greater than the spousal benefit. A restricted application for spousal benefits allows a married person to file at "normal retirement age" to receive the lesser spousal benefit and allow the individual's own benefit to increase by earning delayed retirement credits, up to age 70, at which point she shifts to her own benefit. Use of the restricted application strategy for spousal benefits will no longer be possible for anyone who is younger than 62 on January 1, 2016. For those under this age limit, someone eligible for both her own benefit and a spousal benefit will generally receive the larger of the two benefit amounts. (If the spousal benefit is the greater of the two benefits and her spouse files for his benefit, making her now eligible for spousal benefits after filing for her own benefit, the benefit will be reduced if her own benefit was claimed prior to full retirement age.)
Given the complexity of Social Security, the significant retirement income it represents to most Americans, and these specific changes, please consult with your advisor to determine the best claiming strategy for your retirement plan. While some claiming options are going away, plenty of planning opportunities remain.
The Wagner Wealth Team
Source J.P. Morgan Asset Management. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advise. Individuals should check with their local Social Security Administration office to verify how the new rules will apply to their particular situation.