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Tax Tip of the Week | No. 328 | The Future of Retirement Planning – Part 1 November 11, 2015

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Tax Tip of the Week | November 11, 2015 | No. 328 | The Future of Retirement Planning – Part 1

We are going to run a three-part series of articles written by Wealth Management.com.  Several legislative changes are on the horizon that will impact everything we know about retirement planning.  Here is what Washington lawmakers have in their crosshairs:

File-and-suspend no more?

File-and-suspend is a variation on the more straightforward strategy of delayed filing to earn a higher monthly benefit down the road. Mainly, it permits married couples to have their cake and eat it too—they can earn credits for delayed filing and bring in some Social Security income while they wait. The White House has proposed eliminating it on grounds that it’s a loophole mainly benefiting upper-income households.

The ability to file-and-suspend was granted under the Senior Citizens’ Freedom to Work Act of 2000. How valuable is it? For a typical couple, lifetime benefits can increase 13 percent or more. But that comes at a cost to the Social Security trust fund—$9.5 billion annually, according to the Center for Retirement Research.

The White House proposed ending file-and-suspend in its fiscal 2015 budget plan, calling it an “aggressive” Social Security claiming strategy that allows “upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits.”

That assertion is debatable. A study by the Center for Retirement Research at Boston College found that the benefit doesn’t belong to the wealthy exclusively: 46 percent of the benefits flow to the top 40 percent of households as measured by wealth. What’s more, any type of delayed claiming strategy will benefit lower-income households most because they are more reliant on Social Security as a source of replacement income.

There are several ways to use file-and-suspend. But here’s the most typical: First, the spouse with the higher benefit files at his or her full retirement age (FRA), then immediately files a notice to suspend payment of those benefits. That permits the spouse with the lower primary insurance amount (PIA) to file for a spousal benefit, which is equal to half the higher earner’s benefit.

That gets some income flowing to the household while the higher earner continues to accrue higher benefits. The higher earner can wait until age 70 to begin benefits; the lower earner then converts to his or her own full benefit. (Note: The lower earner can convert to full benefits only by waiting until the FRA to file for a spousal benefit.)

The couple receives higher individual benefits for the rest of their lives. If the husband dies first (that’s usually the case), the widow then converts to a survivor benefit, equal to 100% of her spouse’s benefit.

A clampdown on file-and-suspend could be wrapped into a broader Social Security reform package—whenever Congress gets around to that. “It probably would be used to offset the cost of increasing the minimum Social Security benefit for low-income beneficiaries,” VanDerhei says.  Any reform likely would be phased in with some advance warning.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.
Rick Prewitt – the guy behind TTW

…until next week.


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