A Social Security Loophole that Still Exists
The Bipartisan Budget Act of 2015 made what some would consider significant changes to a few key Social Security filing strategies. Specifically, the legislation removed some well-known loopholes that were used by many to increase spousal benefits. These loopholes involved the file-and-suspend and restricted filing strategies.
Why does that matter now? Some of the changes that were made were phased in over a period of time. In fact, that phase-in is still occurring, meaning that there are some individuals that are still eligible to take advantage of one of these “loopholes.”
The Restricted Application Loophole
As you may know, there is an incentive to delaying your Social Security benefits. Every year you delay, your monthly retirement benefit increases (until age 70). One loophole allowed married individuals to begin receiving a spousal benefit at full retirement age, while letting their own retirement benefit grow. This was done by filing what is called a restricted application. A restricted application essentially allows you to choose which benefit you are applying for at the time you file for benefits.
Now, if an individual files prior to full retirement age and is eligible for both spousal and worker benefits, they must file for both benefits at the time of filing, meaning they cannot choose which benefit to apply for. That individual will simply receive the higher of the two benefits. This follows the new requirement called “deemed filing,” meaning that once you file for one benefit, you are deemed to have filed for all benefits.
The changes made to this provision were phased in over a period of about 5 years, which I’ll discuss more below.
The good news is that the deemed filing rule only applies to spousal benefits, not survivor benefits or disability benefits. Therefore, you can choose to begin survivor benefits independently of your own retirement benefit.
The Voluntary Suspension Loophole
This loophole allowed a married worker to voluntarily suspend his/her own benefits after full retirement age, allowing the spouse to receive spousal benefits while the worker was not collecting benefits. Effective April 30th, 2016, spousal benefits can only be received if the worker spouse is collecting retirement benefits.
If you are receiving a divorced spouse benefit, the change in the law does not apply to you. You may continue to receive a spousal benefit if your ex-spouse decides to voluntarily suspend his/her benefit.
If you’re wondering if you can still use the file-and-suspend strategy, the answer is yes! If you started receiving benefits but would now like to voluntarily suspend and earn higher benefits for delaying, you can do so. But, if your spouse was receiving a spousal benefit, that benefit will be suspended as well. And, to voluntarily suspend, you must have at least reached your full retirement age.
Both loopholes are discussed more in-depth at https://www.ssa.gov/planners/retire/claiming.html.1
Why Does this Matter Today?
There are still married couples that can take advantage of the restricted filing strategy, but only for a limited time. For those born in 1953 or earlier, the restricted application strategy is still an option. But to make it work, a few key things must be in place.
First, your spouse must be receiving benefits in order to take advantage of the restricted filing strategy. Therefore, your spouse would need to have been born around 1958 or sooner. Once your spouse turns 62, the spouse would need to file for Social Security and start receiving benefits.
Then, once your spouse is receiving benefits, you would be able to file a restricted application and receive a spousal benefit while your benefit continues to grow until you turn 70.
While this may not sound like a big deal, this strategy can cause a significant difference in the amount of lifetime benefits you receive from Social Security. In fact, the longer you live, the more pronounced that difference will be. For some, it could mean tens or hundreds of thousands of dollars.2
The restricted application loophole is one that is rapidly closing, but is still out there. If you happen to be in the right age range, it could be a filing strategy that is well worth exploring. Regardless of which strategy you choose, it’s important to discuss your options with your local Social Security office and a qualified financial advisor with expertise in Social Security filing strategies.
If you have any questions about Social Security, or would like to know if you qualify for the restricted filing loophole, you can contact CarsonAllaria Wealth Management at 618-288-9505.
1 https://www.ssa.gov/planners/retire/claiming.html; What do the Recent Claiming Changes Mean for Me?
2 This claim is based on confidential Social Security analyses that have been completed. Several assumptions must be made in order to estimate the difference in filing strategies, including but not limited to life expectancy and inflation rates
Follow me on Social Media
CarsonAllaria Wealth Management does not provide tax or legal advice. All articles and posts are provided by CarsonAllaria Wealth Management (CAWM or firm) for informational purposes only. By accessing or otherwise using this Article, you agree to be bound by the terms and conditions set forth below. Investing involves the risk of loss and investors should be prepared to bear potential losses. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the Article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the Article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment strategy. In addition, this Article shall not constitute the provision of personalized investment, tax or legal advice, and investors shall not assume this Article serves as a substitute for personalized individual advice. Information contained in this Article may have been derived from third-party sources that CAWM believes to be reliable; however CAWM does not control such information and does not guarantee the accuracy or timeliness of such information and disclaims all liability for damages resulting from such sources. Links or references to third-party websites are provided as a convenience and do not constitute an endorsement by CAWM, and the Firm is not responsible for the content of any such websites. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.