In November 2015, President Obama signed into law H.R. 1314, more commonly referred to as the Bipartisan Budget Act of 2015. One significant byproduct of the legislation is the elimination or curbing of two Social Security filing strategies that married couples may have been planning to use to optimize their lifetime social security benefits.
The two programs are the “File and Suspend” and “Restricted Application” for spousal benefits filings. As with most things related to federal programs, there’s a great deal of complexity in the details.
What’s at Stake?
File and Suspend – This is when an individual who is at least at full retirement age (age 66 for most claimants) files for his or her own retirement benefit and then immediately suspends receipt of those benefits with the Social Security office. This sets a filing date under the individual’s record, which allows a spouse or dependent to then initiate benefit payments to be paid out to them based upon the filing individual’s record.
These auxiliary payments do not negatively affect the benefits to be received by the original filing individual. In fact, since the individual suspended his or her own Social Security benefits, their future benefit is allowed to grow. Between age 62 and 70, each year Social Security collection is delayed, benefit payments will increase by 6-8%. This could potentially provide thousands of dollars in additional income to couples over their lifetimes.
Keep in mind that the original person must file first to enable the second person to file for spousal or dependent benefits. After the initial filing, the original filer can continue to receive benefits or elect to suspend. The suspension part is not necessary to enable the auxiliary benefits. Suspending simply allows the original filers’ benefits to grow for a later payout date.
Anytime between full retirement age (FRA) and age 70, the individual could change their mind and “unsuspend” their benefits. The Social Security office would retroactively pay out some or all of the suspended benefits in a lump sum.
Under the Bipartisan Budget Act, starting May 1, 2016, your spouse and children will no longer be able to receive Social security income on your suspended record and you will no longer be able to retroactively collect all past social security income if you elect to unsuspend. If your payments are currently suspended, or if you request suspension before the upcoming May 2016 deadline, you will be grandfathered under the old rules.
Restricted Application – When an individual is at least FRA, has not filed for any previous benefits and has a spouse who has established a filing date (suspension does not matter), they may file a Restricted Application (RA) to receive ONLY the spousal benefit based upon the spouse’s record. Collection of Social Security benefits under the Restricted Application does not affect the individuals’ own pool of benefits. Therefore, this strategy allows one to collect spousal benefits and concurrently delay their own future retirement benefit so it may grow by the same 6-8% per year as mentioned above. Upon reaching age 70, the individual would switch from the spousal benefit income to their own Social Security benefit, which in theory should be larger.
Under the Bipartisan Budget Act, the Restricted Application filing is no longer available to anyone born Jan. 2, 1954, or later. It continues to be available for anyone born Jan. 1, 1954, or earlier.
• For anyone younger than age 66 by May 1, 2016 (born after May 1, 1950), the File and Suspend method will no longer be available.
• For anyone younger than age 62 by Jan. 1, 2016 (born after Jan. 1, 1954), Restricted Application is no longer available.
Window of Opportunity
For anyone younger than age 66 by May 1, 2016 (born after May 1, 1950), the File and Suspend method will be available up until May 1, 2016. After such date, the filing method will be removed as an available option.
Are you thoroughly confused? Determining when and how to claim Social Security benefits has always been a challenging task, but these new rules create even more complexity for those nearing retirement. If you are age 66 now, or will turn 66 within the next three months, definitely speak with your Certified Financial Planner™ or CPA about taking advantage of these claiming strategies before you lose the option to do so.
Financial Ducks in a Row, “File & Suspend and Restricted Application are NOT Equal”
Market Watch, “Millions of Americans just lost a key Social Security strategy”
Market Watch, “New Social Security Rules Change Claiming Strategies”
U.S. News & World Report, “How the Budget Deal Changes Social Security”
Wall Street Journal, “A Strategy to Maximize Social Security Benefits”
The opinions expressed above are solely those of Kondo Wealth Advisors, Inc. (626-449-7783, [email protected]), a Registered Investment Advisor in the state of California. Neither Kondo Wealth Advisors, Inc. nor its representatives provide legal, tax or accounting advice.