4 Social Security Loopholes Most People Miss
Written by
Angela Mae
Edited by
Rebekah Evans
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Social Security was originally created to help keep seniors from poverty. Today, many retirees rely heavily on it to supplement or even fully support their retirement years. As per the Social Security Administration (SSA), 90% of people ages 65 and up receive Social Security. Social Security also makes up 31% of these individuals’ total monthly income.
Considering how vital Social Security is to many people’s finances, you may want to take advantage of these built-in loopholes. Doing so could earn you thousands.
Voluntary Payment Suspension
You can generally start collecting benefits at age 62, but you might already be aware that waiting until you reach the full retirement age (FRA) — either 66 or 67, according to the SSA — means a higher benefit amount.
But did you know that waiting until you’re 70 will get you the highest paycheck?
“Claiming your benefit too early can be pretty costly. Every year someone waits to claim beyond their full retirement age, there are an additional 8% in benefits,” said Krisstin Petersmarck, investment advisor representative at New Horizon Retirement Solutions.
After reaching the FRA, you can voluntarily suspend your Social Security payment until you’re 70. For every year you delay benefits, your monthly paycheck could increase by 8%, per the SSA. Payments automatically start the month you turn 70.
12-Month Do-Over Rule
Did you know that you can get a “do-over” if you start collecting benefits and later decide you want to stop?
“If you claim your Social Security benefits and then wish to ‘undo’ it, you can within the first year you claimed. However, if you do this, you’ll have to pay back any money you received,” Petersmarck said.
Why would you want to do this? It might be because you want a higher Social Security check. Or it might be because you thought you were retired for a few months, such as if you were laid off from work at age 62, but then find another job.
Whatever the case, you’ll need to formally withdraw your application for Social Security using Form SSA 521.
Survivor Benefit and Ex-Spousal Benefit Loophole
Under the SSA, you could qualify for a survivor benefit if any of the following apply:
- You’re 50 and have a disability
- You’re 60
- You have a dependent under age 16 or who became disabled before they turned 22
- You’re a widow or widower and remarry after turning 60
As a survivor, you could collect the survivor benefit while letting your primary benefit grow. This might be worthwhile if the survivor benefit is currently higher than your primary benefit.
Say you’re a 65-year-old survivor and you’re eligible for either a $2,000 survivor benefit or a $1,800 primary benefit. Claiming the survivor benefit means a higher paycheck now while your benefit continues to increase each year (up until you turn 70).
Once you turn 70, you could switch to your primary benefit. Given the potential 8% annual increase (from the FRA to 70), it may be substantially higher than the $2,000 survivor benefit. As a note, there’s also an ex-spousal benefit you might be eligible for.
“If you were married for at least 10 years and have not remarried (or remarried after age 60 or older), you can claim benefits off of your ex-spouse,” Petersmarck said.
This can be helpful if your ex-spouse’s benefit amount is higher than your own.
Tax Loophole
The SSA uses a “combined income” formula to determine whether you must pay taxes on your benefits. Combined income includes your:
- Adjusted gross income (AGI)
- 50% of Social Security income
- Tax-free income from municipal bond interest
Your AGI includes any taxable income — like your 401(k) plan, IRA, dividends, interest, capital gains, wages and other income (including self-employment). Some things that aren’t taxable — like qualified Roth distributions — don’t count in your AGI.
If you’re someone who’s going to have to pay taxes on your Social Security, you may want to contribute to a Roth account rather than a 401(k). With a Roth, you pay taxes upfront but let the money grow tax-free. With a 401(k), you pay taxes on withdrawals. Both options will affect the size of your Social Security benefit, but the Roth option could save you on taxes.
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