Social Security ‘do-over’ strategy may be ending soon
A little-known strategy that could have substantial long-term income benefits for some seniors might end before they know it. The tactic, referred to popularly as a Social Security “do-over,” could give a second chance to increase Social Security retirement benefits. Because the technique has become more widely known and used, the government may be limiting it soon. So time is short. The change could take effect as soon as within a few months. This is how it works now.
Suppose at age 62 you decided to take your Social Security retirement benefits even though they are lower than they would have been at full retirement age (currently 66), and still lower than they would be at age 70. Now, with poor performance on investments, you are having second thoughts. Could you change your mind and get the higher benefit to which you would be entitled at the later age? The answer has been “yes” in some cases. The catch is that you need to give back what you received.
Obviously this is not a strategy for the cash poor. Also, those who want to make use of it will have to consider the source of funds for repayment. It would not make sense to incur substantial capital gains taxes on appreciated assets, for instance, in order to secure the benefit. The thought of returning what could be a substantial sum could be daunting and would not work for everyone but, for some, a Social Security “do-over” makes sense.
The “do-over” candidate should have ample liquid non-retirement assets in reserve. You would not want to pay taxes to the IRS on funds you liquidate to pay back Social Security.
It should also not be necessary to liquidate highly appreciated assets that would generate capital gains. Also, the strategy would likely not make sense for someone in poor health. The idea is that, with a longer life expectancy, you will recoup significantly higher benefits over time. With these considerations out of the way, here are some advantages.
First, there is no interest on the money returned. So the Social Security funds received so far would essentially be a tax-free loan from the government. Next, you could take either a tax deduction or a tax credit on taxes paid because you received the additional early retirement funds. It is probably best to check with a tax professional on this rather than deciding on your own.
Most importantly, the difference in return between receiving Social Security retirement benefits at age 62 and age 70 is significant.
Kiplinger, a respected source on personal finance and investments, describes the difference this way in its Aug. 24, 2010 online article: “Social Security payback option may disappear: Retirees can collect Social Security benefits as early as age 62, but monthly payments are reduced by 25 percent compared with what they would be if claimed at normal retirement age, which is 66 for those who claim benefits this year 2010.
“Those who are willing to wait past age 66 can boost their benefits by 8 percent for every year they delay, up to age 70, increasing annual benefits to 132 percent of their base amount.” Visit www.kiplinger.com.
As reported by Elder Law Answers, an online information source for seniors, economist Larry Kotlikoff estimates that taking advantage of the “do-over” could increase a retiree’s living standard by as much as 15 percent.
See “Social Security may soon put lid on benefits ‘do-over,’” www.elderlawanswers.com. Comparing this with the rate of return on many investments in the private sector, it can be attractive but this depends on living a long life.
The Kiplinger article describes the procedure to follow. First you file a form SS 521, “Request for Withdrawal of Application,” with the local Social Security office. After action on the application by SSA, which could take some time, you reapply for benefits based on the age at reapplication. This could take some time and Social Security benefits for yourself and for your spouse, but only if based on your Social Security, would discontinue in the meanwhile until the new application is received and approved.
The proposed change to the procedure would allow a one-time-only application and it would need to be made within 12 months of the time when the Social Security recipient had begun receiving benefits.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.