Ready or not, Social Security claiming rules are about to change

Claiming rules regarding the popular file and suspend strategy will be overhauled on April 30

By Mary Beth Franklin

Apr 13, 2016 @ 12:01 am EST

What a difference a day makes — particularly when that day is April 30, 2016.

Anyone who is 66 or older by the end of April can still file and suspend their Social Security benefits by April 29 under existing rules that allow them to trigger benefits for an eligible family member while their own retirement benefit continues to grow by 8% per year up to age 70. Those who file and suspend by April 29 also reserve the right to request a lump sum payout of suspended benefits instead of collecting delayed retirement credits.

For example, a higher-earning husband who is 66 or older may want to file and suspend his benefits by April 29 to trigger a spousal benefit for his wife or a dependent benefit for a minor child under age 18 or a permanently disabled adult child. Each benefit is worth up to 50% of the worker's full retirement age amount, subject to family maximum limits.

In the meantime, the husband's own retirement benefit would continue to earn delayed retirement credits worth up to 8% for every year he postpones collecting his benefit beyond his full retirement age up to age 70, potentially boosting his benefit by 32%. A larger retirement benefit also translates into a larger survivor benefit for whichever spouse is left behind.

Or a worker who is 66 or older by the end of April may want to file and suspend by the April 29 deadline to protect the option of requesting a lump sum payout of suspended benefits instead of collecting delayed retirement credits. This strategy works particularly well for single people who have no spouse to collect a survivor benefit in the case of their premature death.

If you suspend your benefits, they will start automatically the month you reach 70. Or, if you change your mind and want your benefits to start before age 70, just tell Social Security when you want your benefits to begin. But if you start benefits before 70, you will receive only the delayed retirement credits you had earned through December of the previous year. You will have to wait until the following January to receive the rest of your delayed retirement credits.

But anyone who requests to file and suspend their benefits beginning April 30 will face a different set of rules. No one — not an eligible spouse or dependent child — will be able to collect benefits on a worker's earnings record during the suspension and the lump sum payout option will disappear. That means if an eligible family member is collecting on your benefits now and you suspend your benefits after April 29, their benefits will stop, too.

So why would anyone want to file and suspend after April 29? It is still a valuable strategy in some situations. Imagine that a husband who collected his retirement benefits as early as possible at age 62. His retirement benefit would be permanently reduced by 25%. Although he may have been willing to accept smaller monthly benefits in exchange for four additional years of income, he may not have realized that by claiming reduced benefits early, his potential widow would be stuck with a smaller survivor benefit if he died first.

That is a perfect scenario to file and suspend even after the April 29 deadline. Once the husband is at least 66 years old, he could voluntarily suspend his benefits and earn delayed retirement credits of 8% per year up until age 70. But if his wife were collecting spousal benefits on his earnings record, her benefits would stop, too.

Don't confuse suspending benefits at age 66 or later with a one-time do-over option that allows you to withdraw your application for benefits within 12 months of first claiming them. You do not have to be 66 to withdraw your application for benefits, but you must have started collecting your benefits within the past 12 months. This withdrawal option will continue even after the April 29 file-and-suspend deadline.

But there's a catch. When you file form 521 to withdraw your application for benefits, you must repay all the benefits you have received. And if anyone else has claimed benefits on your earnings record, such as a spouse or a child, you must repay them, too. Why bother? Withdrawing your application for benefits wipes the slate clean as if you never filed for Social Security. So at a later date when you are older you can claim a bigger benefit.

One more thing to consider. If you voluntarily suspend your retirement benefits, you will be responsible for paying your own Medicare Part B premiums that are normally deducted from Social Security benefits. You will be billed directly by the Centers for Medicare & Medicaid Services for future Part B premiums.

(Questions about new Social Security rules? Find the answers in my new ebook.)

Mary Beth Franklin is a certified financial planner.

Join the Discussion

Most Popular

Affluence Influencers