On Nov. 2, the Bipartisan Budget Act of 2015 was signed into law. This legislation included provisions that will eliminate key Social Security claiming strategies starting this year. Congress viewed these strategies as “unintended loopholes” and their removal will impact thousands of Americans. The claiming strategies eliminated include “File and Suspend” and “Restricted Applications.” You can still take advantage of these strategies, if you qualify based on age, but you will need to act quickly. Details on how the strategies work, the impact of the new legislation and corresponding deadlines are outlined below.
File and Suspend
Let’s use a fictional couple, Bob and Sally, to illustrate how File and Suspend works. Bob and Sally have both reached their Social Security full-retirement age of 66. Current File and Suspend rules would allow Bob to file for his benefit and then immediately suspend it. This allows Sally to begin collecting a spousal benefit on Bob’s record since he has officially filed for benefits. Because Bob suspended his benefit, it will grow 8 percent per year until age 70, or when he begins collecting the benefit, whichever occurs first.
Couples can take advantage of this strategy only if the person who will file and suspend will turn 66 by April 29 and filing must occur by that date.
Under the new legislation the File and Suspend strategy is not available after April 29. After the deadline, in order for Sally to begin collecting a spousal benefit, Bob will also have to begin collecting his own benefit. If Bob delays collecting until age 70, then Sally will have to wait to collect her spousal benefit as well.
Restricted Applications
Benefits under the Restricted Application rules can still be used by couples and divorced individuals as long as they reached age 62 by Dec. 31. Let’s use another couple, Mark and Cindy for this example. Mark and Cindy have also attained full-retirement age of 66.
Current rules would allow for the following strategy: Cindy could file for her Social Security benefits and begin receiving them. Mark could then file a Restricted Application, which allows him to restrict his application to collect only a spousal benefit. This would allow Mark to begin collecting a benefit equal to 50 percent of Cindy’s benefit.
Because Mark is not collecting his own benefit, he can delay to age 70, allowing his benefit to grow at 8 percent per year. At 70, Mark can stop collecting the spousal benefit and start collecting his own benefit, which has grown by 32 percent. The Restricted Application strategy can be used when one spouse starts taking benefits before full-retirement age, as long as the other spouse is at full-retirement age. These are more complex and should be done with advice from a trusted adviser.
This strategy can also be used by divorced couples as long as the couple was married for 10 years and the spouse filing for a Restricted Application is currently not remarried.
We will use Susan to demonstrate how this strategy currently works. Susan was married for 15 years and has not remarried. She has attained her full-retirement age of 66.
Susan could file a Restricted Application and begin collecting a spousal benefit on her ex-husband’s record as long as he is over age 62. It does not matter if her ex-husband has started collecting his benefit. This strategy allows Susan to have some income while allowing her to delay her own benefit. At age 70 or before, she can switch to her own benefit, which will have grown by 8 percent for each year she delayed.
People who turn 62 after Dec. 31 will no longer have the option to delay their own benefits and still collect a spousal benefit. This means they will have to decide whether to begin their own Social Security benefits early or delay them to capitalize on the significant increase in benefits.
For those individuals in good health and a history of family longevity, financial professionals usually recommend delaying Social Security benefits as the best way to maximize the amount you will receive during retirement. Elimination of these key claiming strategies means that good planning around when to start Social Security and how that pertains to your specific retirement situation is critical.
Randy Anderson is a financial professional with RJ Anderson Financial, LLC and is a Certified Financial Planner. He serves on the board of directors of the Financial Planning Association of Colorado and is co-chairman of its pro bono committee. Anderson can be reached at 303-305-5446 or at randy.anderson@axa-advisors.com.
