The Bipartisan Budget Act of 2015 made what some would consider significant changes to a few key Social Security filing strategies. Specifically, the legislation removed some well-known Social Security loopholes that were used by many to increase spousal benefits. These loopholes involved the file-and-suspend and restricted filing strategies.
Why does that matter now? Some of the changes that were made were phased in over a period of time. In fact, that phase-in is still occurring, meaning that there are some individuals that are still eligible to take advantage of one of these “loopholes.”
The Restricted Application Loophole
As you may know, there is an incentive to delaying your Social Security benefits. Every year you delay, your monthly retirement benefit increases (until age 70). One Social Security loophole allowed married individuals to begin receiving a spousal benefit at full retirement age, while letting their own retirement benefit grow. This was done by filing what is called a restricted application. A restricted application essentially allows you to choose which benefit you are applying for at the time you file for benefits.
For those born in 1953 or earlier, the restricted application strategy may be an option. But, as of the date of this article’s update (January 9th, 2023), it seems this loophole has essentially shut. The reason is that anyone born in 1953 or earlier is either already 70 or will be turning 70 in 2023, and Social Security benefits may not be delayed (and increased) beyond age 70.
Aside from that, there are a few other things that would have needed to be in place before taking advantage of the restricted application. First, your spouse must have been receiving benefits at the time you filed your restricted application. Therefore, your spouse would need to have been born around 1958 or sooner in order to take advantage of this (because they would have needed to be at least 62 to file for their own benefits when you filed your restricted application.
Then, once your spouse is receiving benefits, you would have been able to file a restricted application and receive a spousal benefit while your benefit continued to grow until you turned 70.
While this may not sound like a big deal, this strategy could have caused a significant difference in the amount of lifetime benefits you receive from Social Security. In fact, the longer you live, the more pronounced that difference will be. For some, it could mean tens or hundreds of thousands of dollars.2
Again, this loophole has essentially phased out completely as of 2023. I discuss more in the video below. (See video below)
Going forward, if an individual files prior to full retirement age and is eligible for both spousal and worker benefits, they must file for both benefits at the time of filing, meaning they cannot choose which benefit to apply for. That individual will simply receive the higher of the two benefits. This follows the new requirement called “deemed filing,” meaning that once you file for one benefit, you are deemed to have filed for all benefits.
The good news is that the deemed filing rule only applies to spousal benefits, not survivor benefits or disability benefits. Therefore, you can choose to begin survivor benefits independently of your own retirement benefit.
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The Voluntary Suspension Loophole
Prior to April 30th, 2016, this Social Security loophole allowed a married worker to voluntarily suspend his/her own benefits after full retirement age, allowing the spouse to receive spousal benefits while the worker was not collecting benefits. Effective April 30, 2016, spousal benefits can only be received if the worker spouse is collecting retirement benefits.
If you are receiving a divorced spouse benefit, the change in the law does not apply to you. You may continue to receive a spousal benefit if your ex-spouse decides to voluntarily suspend his/her benefit.
You may wonder if there is any reason to use the file-and-suspend strategy today, and the answer is yes, maybe! If you started receiving benefits but would now like to voluntarily suspend and earn higher benefits for delaying, you can do so. This may be the case if you started receiving benefits, but then gained some type of employment, received an inheritance, or suddenly discovered you do not need the benefits you’ve been receiving. If that’s the case, you can suspend your benefit so that you earn delayed credits. But please note, if your spouse was receiving a spousal benefit, that benefit will be suspended as well. And, to voluntarily suspend, you must have at least reached your full retirement age.
Both loopholes are discussed more in-depth at https://www.ssa.gov/planners/retire/claiming.html.1
Bottom Line
The restricted application loophole is one that has basically closed. In my experience, this is the one most people think of when they think of Social Security loopholes. The file-and-suspend strategy, used in conjunction with the restricted filing application, is a thing of the past, and has been outlawed since 2016.
Before you file, it’s important to discuss your options with your local Social Security office and a qualified financial advisor with expertise in Social Security filing strategies.
If you are interested in discussing your retirement plan with an advisor, and have a portfolio value of at least $500,000, contact CarsonAllaria Wealth Management at 618-288-9505 or schedule your free appointment. In just 15 minutes, we can help identify if we’re a good fit to help you sort through issues like Social Security, Medicare, retirement investing, and getting you on the right track toward reaching your own definition of retirement success.
1 https://www.ssa.gov/planners/retire/claiming.html; What do the Recent Claiming Changes Mean for Me?
2 This claim is based on confidential Social Security analyses that have been completed. Several assumptions must be made in order to estimate the difference in filing strategies, including but not limited to life expectancy and inflation rates
As an expert in retirement planning and Social Security filing strategies, it's crucial to understand the intricacies of legislative changes that impact individuals' financial decisions. The Bipartisan Budget Act of 2015 brought about significant modifications to key Social Security filing strategies, specifically targeting loopholes such as file-and-suspend and restricted filing strategies.
The Restricted Application Loophole was a notable strategy affected by these changes. This loophole allowed married individuals to receive a spousal benefit at full retirement age while delaying their own retirement benefit to increase its monthly amount until age 70. For those born in 1953 or earlier, the restricted application strategy might still be relevant. However, as of the latest update in January 2023, the loophole seems to have closed, mainly because individuals born in 1953 or earlier are either already 70 or will turn 70 in 2023, and Social Security benefits cannot be delayed beyond age 70.
Furthermore, specific conditions needed to be met for the Restricted Application Loophole to be utilized. The spouse had to be receiving benefits at the time of filing the restricted application, requiring the spouse to be born around 1958 or earlier. The strategy allowed individuals to receive a spousal benefit while their own benefit continued to grow until they turned 70, potentially resulting in a significant difference in lifetime benefits.
It's essential to note that the deemed filing rule now applies to spousal benefits, requiring individuals eligible for both spousal and worker benefits to file for both simultaneously, receiving the higher of the two benefits. However, this rule doesn't apply to survivor benefits or disability benefits, providing flexibility in choosing when to begin these benefits independently of the retirement benefit.
The Voluntary Suspension Loophole, applicable before April 30th, 2016, allowed married workers to voluntarily suspend their benefits after full retirement age, enabling spouses to receive spousal benefits while the worker wasn't collecting benefits. Effective April 30th, 2016, spousal benefits can only be received if the worker spouse is collecting retirement benefits.
In some cases, individuals might still consider the file-and-suspend strategy today, particularly if they started receiving benefits but wish to voluntarily suspend to earn higher benefits for delaying. However, this action will also suspend any spousal benefits, and individuals must have reached their full retirement age to voluntarily suspend.
As the landscape of Social Security filing strategies evolves, seeking guidance from the local Social Security office and a qualified financial advisor with expertise in these strategies becomes paramount. The recent changes and closures of certain loopholes emphasize the importance of staying informed and making well-informed decisions tailored to individual financial circ*mstances.
