You may have heard about a little-known option in Social
Security where you could repay your benefits and start over as if
you had never received any. This way, you would essentially be
getting an interest-free "loan" from the government, paying it
back, and then retaking a higher benefit later.
For example, Jane starts drawing Social Security at age 62 and
receives $700 a month to help cover her expenses. She then receives
a large inheritance at age 65 and decides she wants to stop taking
her monthly SS benefit, pay back what she's already received, and
reapply when she's 70. This way, she'll then have a monthly benefit
of $1900 for the rest of her life.
Sounds great, right?
Not so fast. Effective December 8, 2010, the Social Security
Administration took measures to close this loophole. Not only did
this claiming strategy cost the trust fund some serious money, but
processing the withdrawal applications was "a poor use of the
agency's limited administrative resources in a time of fiscal
austerity," according to a statement by the SSA. The Administration
also felt that the old policy benefited "those with the least
What happens if you have already started receiving benefits with
the intention to pay them back and reapply later? Unfortunately,
you might be out of luck. While there are no grandfather
provisions, the new rule does give a short window of time where you
may still be able to withdraw.
As it stands now, Social Security has acknowledged that
individuals may need to withdraw an application for benefits when
faced with an unforeseen change of circumstances. In order to
accommodate these situations and prevent misuse of the system, it
has decided to limit the amount of time allowed to withdraw an
Under the new rules, you have 12 months from the first payment
you receive to withdraw an application for retirement benefits.
"There is little to be gained by investing benefits for only 12
months," notes the SSA in the rule. You are also limited to one
withdrawal per lifetime. If you decide you'd like to withdraw
within that 12 month time frame, you must file
and pay back all benefits you have received up to that point -
still free of interest.
If you started receiving benefits longer than 12 months ago, it
looks like you are stuck with that decision at this point.
According to the rule, there are no exceptions. This is where some
controversy has come in. The changes were made swiftly and without
prior warning, but the SSA felt this was the best way to counteract
an inevitable influx of withdrawal applications.
The Administration said that it would take comments from the
public until February 7, 2011, and release an updated, final
statement sometime soon thereafter. No final statement has been
issued yet, but we felt it was necessary to get the latest
information out. We know that over the last few years, this
strategy has become increasingly popular and that many had included
the old policy in their financial plans. Now, this rule change may
very well be a wrench in those plans.
The difficulty in planning anything that is government-related
is that laws can and do change. That's why it's important to
regularly revisit your financial plan, annually at the least. It
should be a dynamic plan that is amended and updated as changes in
your life - and the laws - occur. The lesson learned here is this:
When making financial decisions, consider the long-term effects,
and do what is best for you and your family in the long run.
We'll continue to do our best to provide helpful, informative
content and keep you up to speed on issues that may impact your
financial life. For more on this topic, you can visit the
Social Security withdrawal page
. If you'd like to read the full federal document outlining Social
Security's position on the matter and all the new rules, click
The intent of this article is to help expand your financial
education. Although the information included may be relevant to
your particular situation, it is not meant to be personalized
advice. When it comes to investing, insurance and financial
planning, it is important to speak to a professional and get advice
that is tailored to your unique, individual situation. All
investments involve risk including possible loss of principal.
Investment objectives, risks and other information are contained in
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