Retirement 2.0blog

A refresher course on Social Security claiming rules

New "deeming" rules can trip up claiming strategies

Aug 2, 2017 @ 11:09 am

By Mary Beth Franklin

By now, most financial advisers should be generally familiar with the changes to Social Security claiming rules that took effect last year. But it is the nuances of the new rules that can thwart a carefully crafted retirement income plan.

Based on the numerous emails I have received from advisers, it seems a refresher course is in order. Here is a summary of the claiming rules authorized by the Bipartisan Budget Act of 2015.

The claiming strategy known as "file and suspend" is no longer available, but those clients who took advantage of this strategy before the April 29, 2016, deadline are grandfathered under the old rules, as are their spouses and dependents.

The file-and-suspend strategy could trigger benefits for spouses and/or minor dependent children or permanently disabled adult children while the worker's own benefit would continue to accrue delayed retirement credits worth 8% per year up to age 70. At that point, the worker could claim his maximum benefit — worth up to 32% more than his full retirement age amount — which would also create the largest possible survivor benefit for whichever spouse (or ex-spouse) was left behind.

The strategy also allowed anyone who had filed and suspended their benefits to change their mind at any time up to age 70 and request a lump-sum payout of all suspended benefits in lieu of collecting delayed retirement credits.

Beginning April 30, 2016, anyone can still suspend their benefits at age 66 to earn delayed retirement credits, but no one can collect benefits on the worker's earning record during the suspension, and the worker cannot collect benefits on anyone else's record. The option to collect suspended benefits in a lump sum is no longer available.

The second major change involves new "deeming" rules. Essentially, whenever someone is entitled to more than one type of Social Security benefit, they are now automatically "deemed" to apply for all available benefits and would be paid the larger of the two amounts.

In the past, the deeming rules only applied when benefits were claimed before full retirement age. Now, deemed filing is extended to apply to those at full retirement age and beyond.

There are two exceptions to this new deeming rule. One applies to spouses and eligible divorced spouses based on birth date. The other applies to widows, widowers and surviving ex-spouses.

People born before January 2, 1954, still have the right, when they turn 66, to claim only spousal benefits — worth 50% of a worker's full retirement age benefits amount — and allow their own benefits to continue to grow up to age 70. That assumes their spouse has already claimed benefits or filed and suspended benefits before the April 29, 2016, deadline. Only one spouse in a married couple can claim spousal benefits.

In the case of divorced spouses, if the couple had been married at least 10 years and divorced for at least two years, each ex-spouse can claim Social Security benefits on the other's earnings record — even if the worker had not yet claimed benefits. But to claim only spousal benefits at age 66, one must have been born before 1954.

In explaining the changes resulting from the new law, the Social Security Administration offered the following example. Maria turns 62 after Jan. 1, 2016, and her husband, Joe, is 65. They have each worked enough years to earn a retirement benefit. In March of 2020, Maria has reached her full retirement age and files for benefits. Maria is eligible for a spousal benefit on Joe's record. Maria must file for both benefits. She can no longer file only for the spousal benefit and delay filing for her own retirement. She will receive a combination of the two benefits that equals the higher amount.

The new deeming rules do not apply to survivor benefits. When a surviving spouse is also entitled to his or her own retirement benefits, he or she can still claim one type of benefit first and switch to the other type of benefit later if it would result in a larger amount. Survivor benefits are worth the maximum amount if claimed at the survivor's full retirement age. Retirement benefits continue to grow up to age 70.

It's important to note that anyone who claims any type of Social Security benefit before full retirement age—including retirement, spousal or survivor benefits—and who continues to work is subject to earnings restrictions. In 2017, they would forfeit $1 in benefits for every $2 earned over $16,920.

0
Comments

What do you think?

View comments

Recommended for you

RIA Data Center

Use InvestmentNews' RIA Data Center to filter and find key information on over 1,400 fee-only registered investment advisory firms.

Rank RIAs by

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

Events

Big trends in RIA acquisition

Consolidation is continuing. Acquisitions and mergers are on the rise. Is there an AUM threshold that advisers need to reach for a practice to be viable? CapTrust's Rush Benton offers some perspective.

Latest news & opinion

Raymond James executives call on industry to keep broker protocol

Also ask firms to pay for the administration of the protocol to 'ensure its longevity and relevance.'

Senate committee approves tax plan but full passage not assured

Several Republican senators expressed reservations about the bill, and the GOP cannot afford too many defections.

House passes tax bill, focus turns to Senate

Tax reform legislation expected to have more of a challenge in upper chamber.

SEC enforcement of advisers drops in Trump era

The agency pursued 82 cases against advisers and firms in fiscal year 2017, down from 98 the previous year.

PIABA accuses Finra of conflicts of interest

Public Investors Arbitration Bar Association report slams self-regulator over its picks for board of governors.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print