Baby boomers - if you were born before 1954, we’ve got good news for you and your retirement savings plan. There’s a little-known financial strategy that lets you collect thousands of dollars more in Social Security benefits. This topic is not written about much anymore since a change in the tax law in 2015, but those who are eligible are leaving free money on the table!
Read on to learn more and find out if you qualify.
What is File and Suspend?
“File and suspend” was a claiming strategy that allowed some married couples to strategically maximize their Social Security retirement benefits.
Here’s how it worked: When one spouse reaches full retirement age (or later) they could file for Social Security benefits and then immediately suspend them. The results of this action are two-fold.
- Filing for Social Security would trigger benefits for the beneficiary’s eligible family members, such as a spouse, minor dependent child or permanently disabled adult child.
- Meanwhile, suspending the claim would allow that individual to delay their own retirement benefit while accruing delayed retirement credits. These credits allow your retirement benefits to grow by 8% per year until you reach age 70.
This means the other partner can also postpone filing for their own Social Security payout, while still receiving spousal benefits. Later, at age 70, both partners can switch to their enhanced benefits.
Individuals can receive delayed retirement credits as a lump sum or a monthly payment. At an 8% increase per year, suspending benefits from age 66 to age 70 would put an extra 32% in your retirement savings plan - not bad! Thus, file and suspend became a popular and lucrative strategy for some retirees.
The Bipartisan Budget Act of 2015
Basically, file and suspend was an unintended loophole that cost the Social Security program millions - while at the same time making some well-advised retirees very happy. To save some of that money - and to close a loophole that many deemed as unfair - Congress passed the Bipartisan Budget Act of 2015 (BBA).
Specifically, two major changes in the law prevented couples from using the file and suspend strategy. Under the new law:
- Suspending your own benefits effectively suspends all other benefits on your work record, including spousal or child benefits
- Retirement and spouse applicants of any age (previously only those below full retirement age) cannot file for only a worker or only a spouse benefit; they are automatically filing for both
While the BBA effectively closes the loophole for new claimants, there’s one super important exception to this change that could be very valuable for you, if you meet the criteria.
Who Can Still Take Advantage of the File and Suspend Strategy?
Anyone born before Jan. 2, 1954 was “grandfathered in” by the law, which means the second change above doesn’t apply to them. From now until they reach age 70, these lucky individuals can still file what is called a “restricted application” only for spousal benefits while waiting to claim their own benefits later. The spouse must have already started benefits before you’d be able to claim a restricted application.
So if you grew up on I Love Lucy, pogo sticks, and you remember when going to the movies cost less than a dollar - you might still be able to use this strategy. It’s relatively easy to execute and is a great way to pad your retirement income for a few years.
If you are too young or too old to file a restricted application for spousal benefits, don’t fret. You can still plan as a couple to maximize Social Security benefits and make your individual retirement accounts work for mutual benefit.
If you’re not sure if this applies to you or you have any questions at all about using file and suspend to maximize your Social Security, a financial advisor can help. They also know plenty of other ways to help you with other ways to maximize your retirement savings, such as the “tax triangle” and Roth conversions.
Contact us to discuss your situation and get expert advice from a Certified Financial Planner®.