« JLP’s Roundup | Main | What is “Stagflation?” »
A Hidden Benefit of Social Security
By JLP | February 20, 2008
This from an article by Scott Burns I read today:
If you’re retired and are interested in having a higher income for as long as you live, you have two main options:
You can buy a life annuity. This will provide you with an income, with or without inflation adjustments, for as long as you live. But it will leave nothing for your heirs. You can buy a variable annuity with a variety of living-benefit provisions. These will guarantee a lifetime income. The income will be less than a lifetime annuity, but you’ll have a modest chance of future increases, and you may leave something for your heirs. Whatever you choose, the only thing certain is a lot of fine print.
Fortunately, there is a simple alternative. It will work nicely for retirees in their late 60s or early 70s who had opted, years ago, to take Social Security benefits at a relatively young age. That’s millions of people.
If you did this, you know that your benefits are a lot lower than they would be if you had waited and taken benefits later. Your benefits were reduced because taking benefits early meant Social Security would have to pay benefits for more years.
But you can reapply from scratch with these easy steps. Visit your local Social Security office. Make use of a little-known and seldom exercised provision: Request a “withdrawal of application.” By filing SSA Form 521 (.pdf file), Social Security will treat you as if you had never applied for benefits. It will let you immediately reapply for benefits — at your current age.
Yes, there is a catch. And it’s a big one. You must repay every dime you’ve received in past benefits. But because Social Security charges no interest, reapplying turns out to be a really good deal. It represents a way to buy an inflation-adjusted annuity for a price that beats anything offered by the financial-services industry.
Read the rest of Scott’s article to find out the details. I had no idea this could be done. I hate to think what could happen to the system if lots of Boomers decide to do this.
Topics: Retirement Planning, Social Security | 16 Comments »
February 21st, 2008 at 1:52 am
Wouldn’t you have paid taxes on the SS income, so the numbers are as good as they make it seem?
February 21st, 2008 at 6:47 am
You can get a refund for taxes paid on repaid social security. I ran across a less publicized article on this subject matter about a year ago at the following link:
http://www.retireearlyhomepage.com/cheap_annuity.html
“When you withdraw your application and repay the Social Security benefits paid to you to date, the Internal Revenue Service allows taxpayers to take either an itemized deduction or tax credit for any income taxes they paid on the Social Security benefits they received.”
February 21st, 2008 at 7:46 am
This article along with MossySF’s link are the best descriptions I have seen on this. It may not work between 62 and 66 if you have earned income much over $13,560, but if that’s not the case, this is a great way to have your cake and eat it too.
February 21st, 2008 at 8:39 am
Dang! I meant to mention income taxes last night but forgot. I guess that’s what I get for late night blogging.
February 21st, 2008 at 10:42 am
There can be a big difference between an itemized deduction and a credit (depending on whether there is a cap on credit). Does anyone have a link to a site with more detail about how to get some or all of the income tax back? What tax forms are used and what IRS publication covers this? What about state taxes? Etc.
February 21st, 2008 at 1:54 pm
I am too lazy. There is a box at the end of MossySF’s link explains how to get taxes back.
February 21st, 2008 at 4:52 pm
I’m sure they’ll get rid of this if too many people start doing it.
February 21st, 2008 at 4:56 pm
Andy,
Yeah, you’re probably right.
February 21st, 2008 at 5:47 pm
I read this article the other day on moneycentral.msn.com. Reading through it, it sounds great. Stop the SS benefits & reapply for the higher benefit. But wait, I have to pay back everything that I’ve received??? The example in the article indicated the individual had received $95,000 in SS benefits (obviously, in the example, the person started taking out benefits fairly early). Now, let me ask the question, that was so prominently left out of the original article, and this article. Who has that kind of money laying around to pay back??? I’m making an assumption here, but usually if you begin taking out SS benefits early, you need the money, you more than likely don’t have too much excess money laying around. Yes, the new benefit amount is great…but at what cost? The original article would’ve been much more informative, and complete, if it had included this glaring omission.
February 21st, 2008 at 10:01 pm
Maria, someone would have that much money lying around if they planned to do it from the start. Suppose the original plan is to wait until age 70 to draw social security. However, instead of taking max benefits at 70, you start at 62 and stuff it into a savings account and don’t touch it. If you are getting 20K per year with 2.5% COL increases from ages 62-69, you could earn 52K in interest at 5% before taxes. Pay back 175K, keep 52K in free money and step up to 30K in benefits a year.
This does require somebody who has already planned for retirement beforehand. Perhaps from ages 57-61, you start withdrawing from your retirement accounts (if you can get it penalty free) or realizing capital gains to avoid having income from ages 62-66 that reduce your social security benefits.
February 22nd, 2008 at 6:03 pm
I started taking benefits in 2005 at my full retirement age of 65 years and 6 months. I will be 68 this June. All of the articles I have seen about this talk about early retirement benefits rather than full retirement benefits. Am I eligible to file the Withdrawal of Application even though I was a full retirement age when benefits started?
February 25th, 2008 at 12:01 am
SS isn’t going to be around by the time I’m 66 (or even 56) so this isn’t really a concern for me.
April 25th, 2008 at 8:06 pm
This is a huge loophole in the Social Security system, but I doubt it causes the budget folks much concern. You could probably count the number of people who avail themselves of this alternative in the hundreds each year. Few know about it, and those who do probably could never cough up the cash. I plan to start Social Security at age 62 and my wife at 66 (for me, that’s in about a year). I did the math and I would have to live to 78 to make up in increased benefits (by waiting until 66) what I will get from 62 – 66. When I’m 78, should I live so long, I probably won’t be caring much, anyway.
Yours,
Bozo
October 16th, 2008 at 10:19 pm
My wife is getting a higher amount pegged to my SS. Do I have to pay this difference back in addition to the amount I received? Can I wait untill I am 70? What if my wife dies? Bob
September 21st, 2009 at 7:20 pm
We just received the full refund of 5 yrs worth of taxes paid on my husband’s benefits that we repaid! Hurrah! It took IRS awhile (4 months messing with it) — they obviously don’t handle many of these situations — but in the end, they got it right with a little help from myself and a lot of persistence in saying they got it wrong. We did claim and receive the credit (rather than the deduction) — we are thrilled getting more than 50% more on his monthly benefits. We have a disabled adult child who also draws on his SSA– so with that combo, it will take us only 6 years to break even, and from then on it’s a whale of a deal! Daughter’s benefits increased also — but only up to his full retirement level (age 65) rather than his new start date (age 67). I’m going to wait to take my beneifts until full retirement age so I can get full benefit of his increase now. It’s worth waiting for — don’t want that 7% penalty each year for taking it early.
September 21st, 2009 at 7:21 pm
Just a note about benfits paid – yes, you have to pay back ALL benefits linked to your SS. Dependent wife, dependent child, etc. But if you can come up with the cash to pay back all those benefits you’ve received, it’ll pay you handsomely in the long run!