Social Security Buyback
People who take their Social Security early can lose 20 to 30 percent of its value, but Senior Correspondent Mike Causey says there is a way to recapture it.
Financial planners are split on when is the best time to take Social Security benefits. Should you take a reduced benefit at age 62 which can reduce your benefit 20 to 30 percent, should you wait until your FRA (full retirement age) or delay it until 70 to get a bigger benefit?
Many people who took their benefits as soon as they could now regret it. They wish there was a way to undo what they did. Well, it turns out there is according to financial planner Ed Zurndorfer.
We hope it helps, and that you pass it on to a friend:
Individuals with 40 or more credits of Social Security are eligible to receive their Social Security retirement benefits starting as early as the month after their 62nd birthday. However, by choosing to start receiving benefits before they attain their “full retirement age” (FRA), their benefits will be permanently reduced. The reduction in monthly benefits can range from 20 to 30 percent depending on an individual’s year of birth. One reason cited for an individual to start receiving benefits earlier than his or her FRA is if the individual expects a shorter than normal life expectancy.
Suppose an individual decides to receive benefits before his or her FRA. Can the individual later change his or her mind and reapply for benefits in order to receive a larger monthly allotment? The answer is yes. Social Security allows an individual to cancel an earlier decision to receive benefits and to resume receiving benefits at a later time. The individual must have sufficient monies available to reimburse the Social Security Administration (SSA) for the full amount of the monthly benefits previously received. Fortunately, the SSA does not add interest or penalty charges to the reimbursement.
After repaying previously received benefits, the individual can later reapply for benefits and receive a higher monthly amount.
The following example illustrates the potential benefit of repaying previously received Social Security benefits.
Fred, born Jan. 2, 1945, decided to start receiving his Social Security benefits at age 62. His first monthly retirement check of $1,531 was received on March 1, 2007. Had Fred had waited until his FRA (age 66) to start receiving his benefits, his monthly Social Security retirement benefit would have been $2,041.
Upon reaching age 66, if Fred refunds 4 years (48 months) of benefits (48 months times $1,531 per month or $73,488), then his monthly benefit will increase to $2,041. After approximately 144 months (12 years), Fred will recover the $73,488 as a result of the increased monthly payment.
Those Social Security recipients who want to repay their benefits in order to receive an increase must fill out Form SSA-521, available for download at www.ssa.gov, and send a reimbursement check to the SSA for all of the monthly benefits previously received. Form SSA-521 requests a reason for why the recipient wants to stop monthly benefit payments. An acceptable reason would be “because it is financially better for the applicant.”
After refunding the full amount of previously received benefits, an individual will need to contact the SSA to reapply for benefits. Also, the individual will not have to amend income tax returns for those years that he or she had paid federal income taxes on the reimbursed benefits. Instead, the individual could claim an “other miscellaneous itemized deduction” on Schedule A for the year(s) the benefits were refunded or submit a claim a tax credit for the extra tax paid in previous years. The latter calculation involves complex calculations. IRS Publication 915 (Social Security and Railroad Retirement Benefits”, available for download at www.irs.gov) should be obtained for more information and guidance. In particular, the section titled “repayments more than gross benefits” describes what needs to be done when there is payback of benefits received in previously years.
Does the payback of benefits make sense for every recipient who decided to receive their benefits “earlier” than “later”? With some individuals, probably no. Those individuals with health concerns who might not live a normal life span and those who may need a lump sum of monies to pay for nursing home or assisted living expenses should avoid the payback strategy. These individuals may not qualify for long term care insurance and will have to self insure for possible future long term care.
Another factor is the opportunity cost of money. Those individuals who refund the money to the SSA and then delay their benefits for a few years are missing out in investing opportunities from the lump sum of money used to make the payback.
But reimbursing one’s Social Security benefits could result in a fairly lucrative “nest egg” in the near future. Delaying these benefits means increases that are fairly substantial and guaranteed. In addition, there are annual cost of living adjustments. The alternative to this lump sum payback would be to invest in a fixed annuity with an insurance company. However, fixed annuities can be expensive, especially if one is looking for annual increases in monthly benefits that would attempt to duplicate one’s Social Security monthly benefits.
It should be noted that a widow or a widower who are receiving Social Security survivor benefits cannot make a repayment and reapply for benefits received on behalf of a deceased spouse. The same is true for a divorced spouse who has not remarried and is drawing on a former spouse’s benefits.
Edward A. Zurndorfer is a Certified Financial Planner and Enrolled Agent in Silver Spring, Maryland. He is a benefits, financial and income tax planning speaker at seminars sponsored by NITP, Inc. He is also a registered representative with Multi-Financial Securities Corporation (Branch A9X), member FINRA/SIPC, also located in Silver Spring, Maryland.
Nearly Useless Factoid
Seventy-five years ago today was a nearly euphoric day for beer lovers. According to JoeSixPack, a long-awaited revision to the infamous Volstead Act kicked in on this date, allowing the sale of beer. It would be another eight months before the 21st Amendment officially ended prohibition. Here’s mud in yer eye!
To reach me: mcausey@federalnewsradio.com
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