Social Security benefits might seem fairly cut and dried, but unless you know when and how to claim them, you may not maximize your potential benefits. With sound financial advice from a CPA, many married couples can file and suspend one partner’s benefits to earn additional delayed credits. Couples who are nearing full retirement age should talk to their financial advisors to see if file-and-suspend strategies can work for them.
Under current Social Security rules, one partner must file for benefits to enable the other spouse to qualify for spousal benefits. Deciding which partner should file first has a potentially major impact on both spouses’ benefits. If the higher earner retires first, his or her income affects the benefits the other partner receives. To maximize potential earnings for both partners, the higher earner registers first and immediately suspends benefits. By suspending Social Security payouts, the high-earning partner accrues delayed pay credits at a rate of 8 percent annually until age 70. This benefit then pays out at a 32 percent higher rate than it would have if the claimant accepted it at age 66.
The file-and-suspend strategy allows the lower-earning partner to make a claim immediately and start collecting benefits for the household while the higher-earning spouse allows the maximum value of each payment to increase. The advantage here is clear: By deferring payments, households earn the full bonus of delayed claims while still receiving Social Security income. When age differential allows it, the higher earner should register first to make the most of that 8 percent annual deferment increase.
For couples whose age difference is larger than the four-year gap between the full retirement age of 66 and the maximum benefit age of 70, there are two options. Either the elder partner in the household can claim benefits at age 66 and accept the income even though it has no bonus for deferment, or the couple can defer as long as possible to earn the additional deferment income. A financial advisor can help couples decide which option is best and find ways to maintain a high standard of living throughout the deferment.
Even when couples cannot take full advantage of file-and-suspend strategies directly, suspending benefits may still make sense for some Social Security applicants. Some couples who plan to defer to age 70 find their circumstances have changed, leading them to start receiving Social Security benefits earlier than expected. In these cases, Social Security pays only six months of back-dated benefits. However, for those who file and suspend benefits voluntarily, then find they must start receiving benefits before their 70th birthdays, Social Security pays all suspended benefits. That financial windfall can be especially important to families that have a pressing need for starting benefits early.
Filing and suspending may seem like the right choice for everyone based on how back-dated benefits accrue, but it may not be the ideal option for every couple. By filing for Social Security, recipients are automatically enrolled in Medicare Part A. If the beneficiary is also part of an HSA health plan, the new Medicare enrollment supplants the plan and makes it impossible to continue contributions to the existing plan. Most households won’t face this issue, but for those that do, it could be a deciding factor in the choice to file.
Navigating Social Security’s complexities is a job for professionals. Discuss Social Security claim options with a CPA who has experience with the intricacies of filing and voluntarily suspending to get the most from benefit payments.
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