Social Security Loophole Closes

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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 need."

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 application.

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 Form SSA-521 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 here .

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 the Snider Investment Method Owner's Manual; read and consider them carefully before investing. More information can be found on our website or by calling 1-888-6SNIDER. Past performance is not indicative of future results.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance , Retirement

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