Investor Education | New law closes Social Security loopholes

A new law passed late in 2015 — the Bipartisan Budget Act — effectively closes down two popular Social Security strategies for retirees. However, with proper planning, you may still be able to maximize your benefits in retirement.

Basic rules: When you retire and apply for Social Security benefits, the monthly benefit is based on your personal work history and, if you are married, the work history of your spouse. If you would receive a higher amount of benefit based on your spouse’s work history, you are entitled to that amount.

Another critical factor is the timing of your application to receive benefits. To receive 100% of the available amount, you must have attained full retirement age (FRA). Alternatively, you can elect to receive a lower monthly benefit by retiring as early as 62 or a higher amount by retiring as late as age 70. In either case, the reduction or increase in benefits is gradual, depending on the difference from the age of application and FRA.

FRA varies according to your date of birth. For those born from 1943 through 1954, FRA is age 66. It increases gradually before reaching age 67 for those born after 1959. Previously, retirees could generate extra benefits through either one or a combination of two strategies: the “file-and-suspend” strategy and the “restricted application” strategy.

1. File-and-suspend strategy: With this strategy, a worker claims benefits and then suspends them, thus earning extra So- cial Security credits. For instance, the higher earning spouse cold put in a claim at FRA (currently, age 66) and then suspend benefits until age 70. In the meantime, the lower-earning spouse could claim benefits based on the higher-earning spouse’s work history.
   
   Effective after April 30, 2016, the new law eliminates the file-and-suspend strategy.
   
   If the higher-earning spouse chooses to suspend benefits, the benefits of the lower-earning spouse will also be suspended. However, you may still be able to use this strategy if you will reach FRA before May 1, 2016. What’s more, if you were al- ready using the file-and-suspend strategy, you can continue to do so under the new law.
2. Restricted application strategy: A lower -earning spouse who is nearing FRA files a restricted application for spousal ben- efits only based on the higher-earning spouse’s work history. Then the lower-earning spouse waits until age 70 to apply for benefits based on his or her own work history thereby adding Social Security credits.
   
   The new law eliminates this strategy for spousal benefits. If you are turning age 62 after 2015, you must claim all of your benefits based on the higher amount of your own benefits or your spousal benefits. However, if you attained age 62 before January 1, 2016, you can still use the restricted application strategy when you reach FRA.
   
   Despite these significant changes, the basic rules relating to Social Security remain in effect. If you are approaching retirement, you may face important decisions that could affect your monthly benefits. Rely on your professional advisers for guidance.

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