Changes to Social Security Spousal Benefits You Need to Know

Congress' Bipartisan Budget Bill of 2015 contains a drastic change to a popular Social Security filing strategy with major financial consequences for couples. It eliminates the option to file and suspend with a restricted application as of April 30, 2016. To change your tax-filing strategy and continue to maximize your Social Security benefits , you need to understand what the new restrictions mean for you.

Social Security spousal benefits: the file-and-suspend strategy

The current filing strategy -- commonly referred to as file-and-suspend -- works like this for a married man and woman: One spouse can file for his Social Security benefit once he's reached the Social Security retirement age of 66. He can then immediately tell Social Security to suspend that benefit. This allows his spouse to draw a spousal benefit, which is half of what the first spouse's benefit would have been.

The non-filing spouse can file an application for restricted benefits -- a restricted application for Social Security spousal benefits -- based on the first spouse's suspended benefit. The suspended benefit will continue to draw delayed credits and grow until the person reaches age 70, at which time he could resume his benefit. Likewise, the spouse drawing the spousal benefit can let her own benefit grow until age 70 at which time that spouse could switch to her own benefit if it is larger than the Social Security spousal benefit, or continue to draw the spousal benefit.

How file-and-suspend and restricted application work together

Investment advisor representative and president of Mainstay Financial Group Annalee Leonard gave the example of the Social Security eligibility of a married couple with both spouses aged 66 and the husband as the higher-wage earner:

"It'd be much better for him if he can wait till 70 to take his Social Security and let's suppose he's still working and putting into it -- even more reason to wait till 70," Leonard said. If the husband were to file and immediately suspend his benefit, his wife could then go in and file for spousal benefit. If the husband's benefit at that stage is $2,000, the wife would get $1,000 per month as her spousal benefit.

"Now that's good if her benefit would be only $800 a month, but let's suppose her benefit is higher and she wants to keep working. She can go file and suspend, she can collect on his, she can still be putting into hers, and at 70 they both switch to their own benefits and give themselves a raise -- you can't do that anymore."

The following table is based on Leonard's example, using the assumption that the wife's own benefit is $1,000 per month and that each person lives to age 90. Putting off receiving Social Security checks until age 70 generally provides a 25% increase in Social Security benefits -- which would mean a delayed benefit of $2,500 per month for the husband and $1,250 for the wife in this example.

Note the significant difference in total Social Security retirement benefits received if the couple uses the file-and-suspend with restricted application, or uses the file-and-suspend strategy only, or chooses to file and begin collecting benefits at the Social Security retirement age of 66:

This strategy of using both the Social Security file-and-suspend rule and a restricted application can add $60,000 or more to a couple's Social Security earnings over the four years between their full retirement age and age 70. But now that the Bipartisan Budget Bill will be going into effect, many couples will lose out on this.

Why the file-and-suspend rules have changed

The reason behind the change in the file-and-suspend rules is that this strategy is viewed as a loophole in the Social Security program. By disallowing the current filing strategy, Congress is focused on saving money and tightening any existing gray areas.

"Social Security faces a deficit over the next 75 years. That's why they're making changes," Leonard said. "File-and-suspend was never supposed to be used the way it turned out being used. They never really meant it to be that you file, you stop, the spouse claims, then you claim again later. That was never the original intention."

In order to understand how the changes will affect the way you and your spouse file for Social Security benefits, you need to know the details of the changes and how the updates will work. Here are the most important things you need to know about the updated rules and what you can do to enjoy the maximum Social Security benefit while staying within the law.

1. Some people can still use the file-and-suspend strategy

If you have already filed and suspended with a restricted application, you're fine; there will be no changes to your status or benefits. Some workers will still be able to take advantage of the strategy, as it remains available to workers to either have already turned 66 or who will do so before May 1, 2016. Couples who will both have reached their full retirement age can still file and suspend with a restricted application for spousal benefits on or before April 29, 2016.

2. Suspending benefits will work differently

After April 29, 2016, if you suspend your benefits you are also suspending the ability of a spouse or anyone else to claim a benefit based on your work record. Additionally, the ability to file and suspend Social Security benefits and then reinstate them -- to later change your mind and receive retroactive benefits back to the date you suspended -- will be gone.

The original intent of the file-and-suspend strategy will remain. For example, if you retired and filed for your benefit, then later returned to work, you can suspend your benefit and later resume when desired.

3. Limitations for people born in 1953 or earlier

You will still have the option to suspend your benefits with the limitations outlined in the prior section if you were born in 1953 or earlier. However, there are some limitations.

For instance, if you've already suspended or will suspend your benefits before April 30, 2016, the suspension will allow your spouse to continue collecting Social Security spousal benefits. This will continue as your own benefit accrues, explained financial advisor Jim Blankenship of Financial Ducks in a Row . "In addition, you will continue to have the option of changing your mind and receiving retroactive benefits to any point at or after your suspension date," he said.

If your spouse has filed for benefits -- and is receiving those benefits -- you might still be able to file a restricted application and receive a spousal benefit based on his or her earnings. If they have filed and suspended you will not be eligible to receive a spousal benefit while his or her benefit is suspended after April 29, 2016.

However, you will still have the option to file a restricted application for a spousal benefit once you reach your full retirement age if your spouse filed and suspended on or before April 29, 2016, or is drawing his or her own benefit at that time.

4. Limitations for people born in 1954 or later

The same rules apply for the suspension of benefits if you were born in 1954 or later. If you suspend your benefits, your spouse or any other family member will not be able to receive a benefit based upon your earnings.

A change in the deemed filing rules effectively eliminates the restricted Social Security application for those born in 1954 or later. Deemed filing means that if you file for a spousal benefit under anyone's earning record, you are deemed to have filed for all benefits available to you -- including your own. This eliminates the ability to file a restricted application for a spousal benefit and no longer allows your own benefit to grow and accrue delayed credits until a later date.

5. Impact on divorced couples

In addition to married couples , these new rules will have an impact on divorced couples . If you were born in 1953 or earlier, and still have the ability to use a restricted application, you have an advantage.

You will still be able to file a restricted application to receive a spousal benefit from your ex-spouse's earnings. However, if you file this restricted application after April 29, 2016, and your ex-spouse files and suspends, he or she will not be able to draw a benefit for his or her earnings.

If you're a divorcee and were born in 1954 or later, the deemed filing rules will take effect. This essentially eliminates your ability to do a restricted application based upon your ex-spouse's earnings and allows your ex's benefit to grow until age 70.

6. Impact on widows and widowers

There does not seem to be any impact on you if you have been widowed . You will still have the option to file a restricted application to receive a survivor's benefit, or your own benefit, while letting the other benefit grow via deferred credits. At age 70 or younger, you'll retain the option to convert to the other type of benefit if that is more advantageous.

Currently, Supplemental Security Income also remains unaffected.

7. When delaying your benefit still makes sense

The answer of when to delay benefits varies from case to case. This is especially true for the spouse with the higher earnings record and benefit record. If this applies to you, it will still make sense for you to delay taking your benefit as long as possible. The earnings difference between taking a benefit at 62 and waiting until your full retirement age is approximately 25%; and the difference in waiting longer from your full retirement age to age 70 is an increase of about 8% per year.

Not only would this increase your spouse's benefit, but a survivor's benefit would increase as well. As for the spouse with the smaller benefit level -- especially if the difference is significant -- it might make sense for them to apply for Social Security before age 70. As with many things in the world of financial planning, it really depends on your specific circumstances.

Smart alternative strategies for maximizing Social Security benefits

Beyond Social Security claiming strategies, couples who might have used this strategy will need to rethink their pre-retirement financial planning, especially for those within a few years of retirement. But here are a few things you should consider:

  • Phased retirement is a non-standard concept that is catching on with a number of organizations. Under this type of arrangement, you might move into a smaller role within the company and perhaps work fewer hours. The extra years of compensation could offset the loss of being able to use the file-and-suspend strategy.
  • Max out your workplace retirement plans, such as a 401(k). These are peak earning years for many, and every bit you can save for retirement helps. Although those approaching retirement should be doing this anyway, it is even more important for those within 10 years of retirement.
  • If you're a self-employed business owner or professional with high earnings, you might consider starting a pension plan. This can be a great way to save a lot of money, especially for those behind in their retirement savings.

Understanding the changes around the file-and-suspend and restricted application strategies can help you decide what traditional or alternative strategies are right for you, but professional help might be key to maximizing your benefits. If you're planning for retirement, now more than ever you should consider seeking the advice of a qualified financial advisor to help you navigate Social Security and all aspects of your retirement financial plan.

Ruth Sarreal contributed to the reporting for this article.

This article originally appeared at GoBankingRates .

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