Advanced Underwriting Consultants

Ask the Experts – February 5

Ask the Experts!

The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers.  Here’s the question of the day.

Question: The file and suspend option for Social Security benefits is often used for married individuals, but is there any reason for a single individual to file and suspend?

Answer: Yes, at least according to one Social Security expert.

An individual can choose to file for Social Security benefits after he reaches full retirement age (FRA). The classic reason to file and suspend is to allow one’s spouse the ability to begin receiving spousal benefits while still allowing the original filer to earn delayed retirement credits (DRCs), increasing his retirement benefit by 8 percent every year he delays receiving his benefits until age 70. Here’s a previous blog entry further discussing this strategy.

Perhaps a lesser known or utilized reason to file and suspend is to allow the filer to, at any time, receive a lump sum payout of his accrued suspended benefits.

Ordinarily, when an individual starts receiving Social Security benefits, he may elect to have his start date applied up to 6 months prior, resulting in a lump-sum payout for the foregone months. However, this election would lower his accumulated DRCs to the previous levels at retroactive date. An individual cannot apply for retroactive benefits for any month prior to his FRA.

For example, consider Morris, an individual whose FRA is 66, and at such age, his full retirement benefit is $2,000 per month. Assume that Morris delays his start date until he’s 68 years old, at which point his accumulated DRC have increased his monthly payment to $2,320.

Morris has the ability to apply his start date retroactively to when he was age 67.5, at which point his monthly benefit was $2,240. He would receive a 6-month lump sum payout of $13,440 (the product of his $2,240 monthly payment for 6 months), and his DRCs would be permanently reduced to age 67.5 levels (from $2,320 to $2,240).

Why might an individual like Morris wish to apply his start date 6 months retroactively? He may need the lump-sum for an unrelated personal or business reason. He also might have recently been diagnosed with a terminal illness or some other health concern that is expected to significantly shorten his life expectancy, making the reduction of future payments less damaging.

For these reasons, an individual might wish to retroactively start receiving Social Security benefits well before only 6 months prior. For example, if Morris could retroactively receive benefits when he was 66 years old, he would receive a lump sum payment of $48,000 (the product of his $2,000 monthly payment for 24 months).

If an individual wants an option to receive a lump-sum payment of benefits beyond only 6 months, he could file and suspend at any point after he reaches FRA. This allows the individual to earn DRCs while also giving him the ability to receive a lump sum payment of his suspended benefits back to the date of suspension.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.