Congress recently passed a budget bill that included some important changes to a popular couples Social Security claiming strategy. This strategy, file and suspend with a restricted application for spousal benefits, can add $60,000 or more to overall benefits collected by a couple. Congress deemed this a loophole in the rules and an unintended windfall and this opportunity will go away six months after the Bipartisan Budget Act of 2015 becomes law, which should happen on April 30, 2016.
File and Suspend: Act Now
Once you reach your full retirement age (FRA) you file for your benefit and then suspend it, effectively telling the Social Security Administration to not pay you. The reason to do this is to allow your earnings credits to continue to accrue until a later date, presumably age 70, while allowing a spouse or in some cases other family members to draw a benefit based upon your earnings record.
This allows you to accrue delayed credits which mean that your benefit will grow by 8% per year until age 70. The file-and-suspend strategy then allows other family members to claim a benefit based on your earnings record and allows your own benefit to continue to compound and grow. (For more, see: 10 Common Questions About Social Security.)
The recent budget bill changed this for millions of Americans.
Under the current rules, once you reach your FRA you are allowed to file a restricted application. Many people are eligible to receive various Social Security benefits. Besides their own they may be eligible to receive a spousal benefit if married. The restricted application allows a spouse to claim a spousal benefit based upon their spouse’s earnings record as long as their spouse has filed for benefits. (For more insight, see: Social Security Depletion: Is the Fear Justified?)
File and Suspend with Restricted Application
At full retirement age one spouse will file for their benefits and then suspend them allowing their benefit to continue to grow until age 70 or at least to some point in the future when they will resume collecting them.
The other spouse once they reach FRA then files a restricted application to receive a spousal benefit based on their spouse’s benefit. They will continue to collect the spousal benefit, half of their spouse’s full benefit, until age 70 when they would convert to their own benefit if it is higher than the spousal benefit.
Often this is used when one spouse’s benefit is significantly higher than the other’s. There are other uses as well. For example, I am working with a client couple where both have reached FRA and one plans to work for several more years, so that spouse will file and suspend while the other spouse will file a restricted application to get their spousal benefit until age 70 when this spouse will collect their own benefit, which is roughly the same as the spouse who will continue to work. (For more, see: Why Boomer Retirements Will Be Vastly Different Than What They Planned For.)
Who Can Still Take Advantage?
Those who have already executed this tactic and have one spouse collecting a spousal benefit based on their spouse’s earnings record can continue this arrangement with no changes.
For couples considering this strategy it can still be implemented within six months of the bill being signed into law. Again the same rules apply, both spouses should be at least at their FRA. (For related reading, see: File and Suspend: Still An Option, But Act Fast.)
After the Deadline
After the six month deadline the grandfathering for those who haven’t already executed file and suspend with a restricted application goes away and couples will not be able to newly implement this strategy.
The Elimination of the Restricted Application
The Bipartisan Budget Act of 2015 effectively eliminates the restricted application for those who will turn 62 after Jan. 1, 2016. Those who turn 62 after this date will be deemed to have filed for both a spousal benefit and their own retirement benefit when they apply for a benefit. This is how it currently works for those who have not reached their FRA.
What this means is that if you file for just a spousal benefit Social Security will also deem that you have filed for your own benefit eliminating a key benefit of the file and suspend with a restricted application strategy. You will not be able to collect a spousal benefit based upon your spouse’s earnings record and still allow your own benefit to accrue delayed credits until age 70. (For more, see: The Worst States for Taxes During Retirement.)
Every situation is different and it still may be advantageous in some case for one spouse to file for their spousal benefit, for example if their own benefit is rather low or if they haven’t qualified for a retirement benefit on their own. But even here the longer they wait the larger that benefit will be as well.
New File and Suspend Rules
Effective six months after the Bipartisan Budget Bill is signed into law file and suspend is greatly modified as well. After that time in order for a family member to receive a benefit based upon your earnings record you actually have to be receiving a benefit. This of course negates the advantages of the current file and suspend tactic and puts an end to it as a viable couple’s strategy.
Additionally, the ability to receive a retroactive payment for prior benefits if they changed their mind will be gone after the deadline as well.
File and suspend is still available for the reason it was originally intended: If you were to file for a benefit and later return to work you can still suspend your benefit and let it accrue until such time as you resume taking it. (For more, see: Top Tips for Minimizing Taxes on Social Security.)
The Role of Financial Advisors
This is a major development in the world of retirement planning and this came about rather suddenly. Financial advisors working with clients who can still execute the file and suspend/restricted application strategy during the six month window will certainly want to do so in most cases.
Beyond this financial advisors will need to rethink retirement planning strategies for younger clients who will not be able to utilize this strategy and who were planning to do so. How will they replace this income?
The Bottom Line
Congress, via the Bipartisan Budget Act of 2015, has eliminated a popular couples Social Security filing strategy — file and suspend. This will hurt a number of folks who will reach their full retirement age after rules change and they and their financial advisors will need to look at alternatives to this strategy. (For more, see: Avoid These Retirement Portfolio Mistakes.)