Social Security Loopholes Closing

1) File and suspend 2) Restricted Application and 3) Retroactive lumpsum loopholes are closing.


The File and Suspend strategy is this:  once one spouse reached full retirement age (currently 66), that person files for Social Security and then immediately suspend the benefits. Then, the husband or wife would claim the spousal benefit.   Meanwhile the suspended benefits grow 8 percent per year until age 70.

The file-and-suspend strategy, as outlined above, will not work after May 1, 2016. After May 1, 2016 a person must file for Social Security and actually receive benefits in order for a husband or wife to receive a spousal benefit.  Those taxpayers who are at least 66 or who will turn 66 by April 30, 2016, can still use the file-and-suspend strategy.

Restricted Applications

The second rule being eliminated relates to restricted applications. A restricted application works like this: if you are between their full retirement age and age 70 you can file a restricted application to claim spousal benefits, but defer your own benefits until age 70. When you reach 70, you can change from receiving spousal benefits to your own, (hopefully) greater benefits.

The effect of the change is that with the elimination of restricted applications and the introduction of deemed filing for all ages, a spouse can only receive the larger of either the spousal benefit or their own benefit. And, they can’t change their choice after having made the election.

Those who will turn 62 by the end of the year will be grandfathered in under the old rules for restricted applications.

Retroactive Lump Sum Payments

The final change applies to suspended benefits. Currently, those with suspended benefits can elect at any time to request payments retroactive back to their filing date.

If, for example, someone filed for Social Security at age 66 and then suspended payments, the benefits would grow at a rate of 8 percent per year. However, if the recipient decided to retroactively unsuspend benefits, he would lose the 16 percent increase he was earning by deferring benefits, but Social Security will send a lump sum payment for the past two years. Future monthly payments would be made at the same rate the man would have received had he started benefits at age 66.

Under the new rules, Social Security beneficiaries can no longer retroactively unsuspend benefits: no more lump sums.

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