Social Security Headquarters

SOCIAL SECURITY-BASIC ISSUES

INTRODUCTION

Social Security has so many “moving parts” and this section of my website will endeavor to educate people about the many, many aspects of Social Security which may impact them.  For the most part, information here will focus on how social security plays an important role in retirement planning.  I encourage my site visitors to check back often for updated information and additional articles.

LET’S START WITH SOME BASIC SOCIAL SECURITY FACTS

EARLY RETIREMENT:   My basic philosophy is, "WAIT IF YOU CAN."

At age 62 you may be able to claim social security benefits based upon your own earnings record or that of your spouse.  However, your benefit at age 62 would be only 75% of what you could receive if you had waited until your “normal retirement age,” which for most people now is either age 66 or age 67.  Your personal financial situation plays a pivotal role in your decision about when to claim benefits.

SPOUSAL BENEFITS:

Many people choose to claim a spousal benefit, either because they do not qualify for benefits on their own earnings, or because they prefer to wait until full retirement age, at which point they switch to their own, higher full benefit.  Generally, a spousal benefit is 50% of the amount your spouse would be entitled to at full retirement age.

*PLEASE NOTE, in order to claim a spousal benefit, your spouse must have filed for their own benefit, even if they suspend their benefit. (See “Claim and Suspend” below)

SURVIVOR BENEFITS:

Such benefits are available to widowed spouses at any age with dependent children under the age of 18 and also as early as age 60 with or without dependent children.

DIVORCED SPOUSES:

Beginning at age 62 (a reduced benefit due to “Early Retirement”), if you had been married to a former spouse for at least ten years, you may qualify for a “Spousal Benefit” based upon the earnings record of that former spouse provided that you have not remarried prior to age 60.  If you remarry after turning 60, your spousal benefit can be based on the earnings record of either your current spouse, or former spouse, whichever is higher.  In either case, that person must have claimed their own benefit. (See “Claim and Suspend” below)

DIVORCE STRATEGIES:

1.  If planning to divorce, try to preserve the option of a spousal benefit by waiting until ten years before making the divorce final
2. If planning to remarry, wait until age 60 so as to preserve the option of claiming a spousal benefit on the earnings of either spouse.

CLAIM AND SUSPEND:

This Social Security strategy is commonly used in a few different scenarios.

1.  The Higher earning spouse might claim their own benefit in order to trigger a “Spousal Benefit” and then suspend their own benefit in order to earn “Delayed Credits” (See Below) and collect a higher benefit later.
2. Anyone, married or single, after having claimed their own benefit between ages 62 and 70, might choose to suspend their benefit until later, so as to earn “Delayed Credits” up until age 70.

DELAYED CREDITS:

A “Full Retirement” benefit is the amount you are entitled to at age 66 or 67.  This is also referred to as your “PIA” or Primary Insurance Amount.  Your delayed credits amount to an increase of 8% each year that you delay claiming your benefit beyond your full retirement age (66 or 67) up until age 70.  The 8% credit accrues at the rate of 2/3% per month, so that credits are earned for partial years as well.

           As I stated above, Social Security indeed has many “moving parts,” and nuances, especially with regard to claiming strategies.  Those strategies also tend to favor married individuals more so than singles.

RETIREES AND NEAR RETIREES MAY NOT HAVE A MORE IMPORTANT DECISION IN THEIR RETIREMENT PLANNING THEN WHEN AND HOW TO CLAIM BENEFITS. 

SOCIAL SECURITY AND TAXES

Are you paying federal taxes on your Social Security benefits?

Maybe you shouldn't be!

For federal tax purposes, Social Security is partially taxable for many people (the tax treatment varies from state to state).  In fact, under current federal tax law, as much as 85% of Social Security may be subject to tax.

When are benefits taxable?

Benefits become taxable when one-half of the annual benefits received is added to all other taxable sources ^(a) of income for the year and the resulting total exceeds certain specified amounts ($25,000 for single filers and $32,000 for married filers).  Suffice it to say, that when one's annual fixed income from sources such as pensions exceeds the above threshold amounts, it is not possible to avoid paying federal tax on at least a portion of the Social Security benefits.  For others, the solution may be simple.

So how can one reduce or avoid paying federal tax on Social Security benefits?

To begin with, let's take a look at the following scenario which depicts how a hypothetical married couple, Bill and Julie, incurred a very different federal tax liability for 2013 as compared to 2012.

For purposes of this hypothetical scenario, let's assume the following about Bill and Julie:

·         both are in their mid-60's

·         each receive a modest company pension

·         each receive Social Security benefits

·         each have a traditional IRA account

·         in 2013 they made combined withdrawals of $18,000 from their traditional IRA's to cover some unusual expenses

·         all other income is virtually unchanged from 2012 to 2013, including Social Security

Now the bad news...

The $18,000 IRA withdrawal increased Bill and Julie's taxable Social Security benefits by $15,300 (85% of total benefits).  So even though their actual income increased by only $18,000, their taxable income increased by $32,800, and their federal tax increased by $4,900. The net effect is that, despite their 15% Federal tax bracket, their additional $4,900 tax equates to 27% of the $18,000 IRA withdrawal. This is not a favorable outcome and not what Bill and Julie expected to happen.

So how might Bill and Julie have covered their unexpected $18,000 expense in 2013 without making more of their Social Security benefits taxable and paying the additional $4,900 tax?

Basically, their strategy might have been to fund their $18,000 expense from a non-taxable source and listed below is a partial list of such non-taxable sources:

• Roth IRA withdrawal
• bank account withdrawal
• home equity loan or credit line
• reverse mortgage
• sale of stock or other investment at no gain
• loan against the cash value of life insurance

Please be aware that some of the above transactions may have other non-tax implications such as service charges and fees.

Conclusion

The advice of a tax or financial professional should be considered prior to engaging in any large or unusual financial transactions and such situations may have even greater consequences for Social Security recipients.

(a) Interest received from tax free municipal bonds is also added to income for the purpose of determining the taxable portion of Social Security benefits.

(b) The gross amount of Social Security benefits for the couple was $38,000 for each year.

I WELCOME THE OPPORTUNITY TO COUNSEL PEOPLE ON SOCIAL SECURITY ISSUES AND MANY OTHER RETIREMENT MATTERS SUCH AS 401(K) ROLLOVERS AND THE DECISION TO CHOOSE A LIFETIME PENSION PLAN OR LUMP SUM PAYOUT FROM EMPLOYER PENSION PLANS.