Thanks again to all of you for your interest in my new book, The Little Black Book of Social Security Secrets. I’ve received a lot of questions about the best Social Security strategies for married couples, and my most recent blogs have given some examples where the File and Suspend strategy might be beneficial. Now I want to cover some examples for those of you who have two-income households, and who might benefit from filing a restricted application for benefits.
Tony, 72, and Maria, 67, read my book and wondered if they should reconsider their Social Security strategies. Both are still working, and full time. Tony applied for his benefits as soon as he was eligible, at age 62. Maria has not applied yet. Should Maria apply for benefits, or should she wait? This question, unfortunately, is not as straightforward as you might hope. Let’s look at all of the facts.
Filing a Restricted Application for Spousal Benefits
Tony is already receiving his Social Security checks, so he doesn’t have a lot of options. But what options does Maria have? Because she was Full Retirement Age (FRA) on December 31, 2015, she can file a restricted application for benefits and specify that she only wants to receive a spousal benefit. Her spousal benefit is a percentage of the benefit based on Tony’s earnings record. In order to be able to file a restricted application for spousal benefits you must be at least FRA, so in this case Maria will receive the maximum spousal benefit of 50 percent. Filing a restricted application for spousal benefits allows Maria to collect some income from Social Security while the benefit payable based on her own earnings record grows by Delayed Retirement Credits (DRCs). When she turns 70, she can switch to her own benefit if is higher than her spousal benefit.
Suppose Tony was only 60, and had not yet filed for his own benefit? Maria wouldn’t be able to file a restricted application for spousal benefits unless Tony has filed for his own benefit. She could apply for benefits based on her own earnings record, but then she’d miss out on those DRCs.
Suppose Tony is 67, and regrets that he started taking his benefits at 62. Can he suspend them without affecting Maria’s spousal benefits? The answer is yes, but only because we’ve changed Tony’s age and are now assuming that he’s 67. You have to be at least FRA, but not yet 70, in order to suspend your benefits after you’ve started collecting them. Why even bother then? Think about it for a minute. If Tony was able to suspend his benefit, the couple could still receive some income from Social Security (Maria’s spousal benefit), while at the same time allowing Tony’s to grow by DRCs. When he unsuspends them, Tony could receive a higher benefit amount, and for the rest of his life. (Don’t forget – if Tony wants to suspend his benefit, he needs to do so by April 29, 2016!)
Restricted Application Deadline
Many people have asked what the deadline is for them to file a restricted application, and unfortunately the answer is not as straightforward as for those who want to file and suspend. The rule is that, if you were at least 62 on December 31, 2015, you can file a restricted application when you reach your FRA. What if Maria is 63? In that case, she couldn’t file a restricted application for benefits right now, but she could do so when she reaches her FRA (for our purposes here, 66). What if Maria is 60? If she is, she will never be able to take advantage of this technique because she was not at least 62 on December 31, 2015.
In real life, my advice would not stop at telling Maria that she should probably file a restricted application. In the original scenario, Maria is 67 and is not collecting Social Security benefits of any kind right now. She could have filed a restricted application for spousal benefits as soon as she turned 66, and she wouldn’t have affected Tony’s benefit or the benefit based on her own earnings record at all. Maria’s missed out on a lot of money! The first thing I would tell her is that, when she files her restricted application, she should ask for retroactive spousal benefits. Retirement claims can be paid for up to six months retroactively.
Changes When Filing a Restricted Application
I’d also want to take a closer look at Tony and Maria’s tax picture, and point out some possible changes that they may not have considered. They have income from their jobs, income from Tony’s Social Security, minimum required distributions from his IRAs, and now they’ll have even more income from Maria’s spousal benefits. Just how bad will the news be for them on April 15th?
Interestingly enough, Tony and Maria have some options available to them that non-working couples do not. Assuming that they don’t need Maria’s Social Security income to live on, I would ask them to consider putting that money right back in to their retirement plans at work. Most of you who read this column regularly know that, once you turn 70 ½, you are generally required to start taking minimum distributions (RMDs) from your IRAs. Some of you may not be familiar with the exception to the rule, though, that applies to individuals who are still working at that age. If you are still working, you are not required to withdraw money from your work retirement plan when you turn 70 1/2. You’re not required to withdraw anything from your work plan at all, until you stop working. There is an exception to this exception, and it applies if you own more than 5 percent of the company. If this is the case, you must take RMDs from your retirement plan at work when you turn 70 ½, even if you are still working.
Here’s another idea for those of you who are still working, and who have IRAs in addition to a work retirement plan. Assuming that the rules of your own plan allow it, you can roll any IRAs that you have in to your work retirement plan. You would not be required to take minimum withdrawals from the plan, or any of the IRAs that you rolled in to it, until you stop working.
Suppose Tony and Maria both work for a large employer, such as the local university? If they are still working, they can still contribute to their work retirement plans regardless of their ages. If they are not already contributing the maximum possible to their work retirement plans, they can use Maria’s new income from her spousal benefits to increase their contributions. If their employer offers them a choice of pre-tax and Roth accounts in their plan, they can allocate their contributions strategically once they have evaluated their short-term and long-term goals. Increasing their contributions to the pre-tax account might help their current tax situation, but increasing contributions to the Roth might be more beneficial in their later years. This is because, as of this writing, you are not required to take minimum distributions from a Roth account. And, if you do take distributions from a Roth account, they will most likely be tax-free.
Suppose Tony and Maria are self-employed, and have a SEP or a SIMPLE retirement plan for their business? In that case, they would fall under the 5% ownership rule, and must take minimum distributions from that plan when they turn 70 ½. But they still might be able to manage Maria’s new income from Social Security more effectively than by just allowing it to accumulate in the bank. If you have earned income, the IRS permits you to contribute to an IRA. In 2016, the annual contribution limit is $6,500. Assuming that Tony and Maria both earned more than $6,500 they could each contribute the maximum to an IRA. But wait! Isn’t it against the rules to contribute to an IRA after you turn 70 ½? Well, you can’t contribute to a traditional IRA after you turn 70 ½, but you are allowed to contribute to a Roth IRA regardless of your age as long as you meet certain income guidelines. So Tony could contribute to a Roth IRA, and Maria could contribute to either.
What if Tony became ill, and was no longer able to work? If Maria is still working, and assuming that she earns enough money, she can still contribute to her own IRA. She can also contribute to a spousal Roth IRA for Tony. The amount that Maria can contribute to both IRAs is limited to the amount of taxable compensation that they report on their tax return. But if she made more than $13,000 in 2016, it would be possible for her to put $6,500 in her own IRA, and $6,500 in Tony’s Roth IRA.
So what’s the bottom line? Even if you are worried about how collecting Social Security will affect your tax picture, you can minimize the impact – especially if you continue to work.
Please check back soon for my next post, which will answer some really complicated scenarios that readers have posed. Thanks for the questions!
Are you confused about how the File and Suspend or Restricted Application strategies can benefit you? Please do not ask your local Social Security office for advice, because they can only present your options about government benefits! The decisions that you make about this affect far more than just your Social Security benefits, and could have unintended complications and/or repercussions if they are not made considering the big picture.
Getting your Social Security decision right is important, but it is even more important that you have the right strategies for all of your planning. To find out if your entire financial house is in order, fill out this pre-qualification form by clicking here to see if you qualify for a free consultation. Western PA residents only please.
Don’t delay. Go to www.paytaxeslater.com/ss to get your free digital copy of The Little Black Book of Social Security Secrets, and then talk to a professional about your options before it’s too late.