How Do Social Security Survivor Benefits Work?
Social Security payments can sometimes be a significant portion of a couple’s retirement income. If your spouse passes away unexpectedly, it can have a dramatic impact on your financial wellbeing in retirement. This is especially
Social Security payments can sometimes be a significant portion of a couple’s retirement income. If your spouse passes away unexpectedly, it can have a dramatic impact on your financial wellbeing in retirement. This is especially true if there was a big income difference between you and your spouse. In this article we will review:
Who is eligible to receive the Social Security Survivor Benefit
How the benefit is calculated
Electing to take the benefit early vs. delaying the benefit
Filing strategies that allow the surviving spouse to receive more from Social Security
Social Security Earned Income Penalty
Social Security filing strategies that married couples should consider to preserve the Survivor Benefit
Divorce: 2 Ex-spouses & 1 Current Spouse: All receiving the same Survivor Benefit
How Much Social Security Does A Surviving Spouse Receive?
When your spouse passes away, as the surviving spouse, you are entitled to receive the higher of the two benefits. You do not continue to collect both benefits simultaneously.
Example: Jim is age 80 and he is collecting a Social Security benefit of $2,500 per month. His wife Sarah is 79 and is collecting $2,000 per month for her Social Security benefit.
If Jim passes away first, Sarah would begin to receive $2,500 per month, but her $2,000 per month benefit would end.
If Sarah passes away first, Jim would continue to receive his $2,500 per month because his benefit was the higher of the two, and Sarah’s Social Security payments would end.
Married For 9 Month
To be eligible for the Social Security Survivor Benefit as the spouse, you have to have been married for at least nine months prior to your spouse passing away. If the marriage was shorter than that, you are not entitled to the Social Security Survivor Benefit.
Increasing Your Spouse’s Survivor Benefit
Due to this higher of the two rule, as financial planners we work this into the Social Security filing strategy for our clients. Before we get into the strategy, let’s do a quick review of your filing options and how it impacts your Social Security benefit.
Normal Retirement Age
Each of us has a Normal Retirement Age for Social Security which is based on our date of birth. The Normal Retirement Age is the age that you are entitled to your full Social Security benefit:
Should You Turn On The Benefit Early?
For your own personal Social Security benefit, once you reach age 62, you have the option to turn on your Social Security benefit early. However, if you elect to turn on your Social Security benefit prior to Normal Retirement Age, your monthly benefit is permanently reduced by approximately 6% per year for each year you take it early. So, if your normal retirement age is 67 and you file for Social Security at age 62, you only receive 70% of your full benefit and that is a permanent reduction.
On the flip side, if you delay filing for Social Security past your normal retirement age, your Social Security benefit increases by about 8% per year until you reach age 70.
There is no benefit to delaying Social Security past age 70.
How This Factors Into The Survivor Benefit
The decision of when you turn on your Social Security benefit will ultimately impact the Social Security Survivor Benefit that is available to your spouse should you pass away first. Remember, it’s the higher of the two. When there is a large gap between the amount that you and your spouse will receive from Social Security, it’s not uncommon for us to recommend that the higher income earner should delay filing for Social Security as long as possible. By delaying the start date, it increases the monthly amount that higher income earning spouse receives, which in turn preserves a higher monthly survivor benefit regardless of which spouse passes away first.
Example: Matt and Sarah are married, they are both 62, they retired last year, and they are trying to decide if they should turn on their Social Security benefit now, waiting until Normal Retirement Age, or delay it until age 70. Matt’s Social Security benefit at age 67 would be $2,700 per month. Sarah Social Security benefit at age 67 would be $2,000 per month.
They need $7,000 per month to meet their expenses. If Matt and Sarah both took their Social Security benefits at age 62, Matt’s benefit would be reduced to $1,890 per month and Sarah’s benefit would be reduced to $1,400 per month. At age 75, Matt passes away from a heart attack. Sarah’s Social Security benefit would increase to the amount that Matt was receiving, $1,890, and Sarah’s benefit of $1,400 per month would end. Since Sarah’s monthly expenses are still close to $7,000 per month, with the loss of the second Social Security benefit, she would have to withdraw $5,110 per month from another source to meet the $7,000 in monthly expenses. That’s $61,320 per year!!
Let’s compare that scenario to Matt waiting to file for his Social Security benefit until age 70 and Sarah turning on her Social Security benefit at age 62. By turning on Sarah’s benefit at age 62, it provides them with some additional income to meet expense, but when Matt turns 70, he will now receive $3,348 per month from Social Security. If Matt passes away at age 75, Sarah now receives Matt’s $3,348 per month from Social Security and her lower benefit ends. However, since the Social Security payments are higher than the previous example, now Sarah only needs to withdraw $3,652 per month from her personal savings to meet her expenses. That equals $43,824 per year.
If Sarah lives to age 90, by Matt making the decision to delay his Social Security Benefit to age 70, that saved Sarah an additional $262,400 that she otherwise would have had to withdraw from her personal savings over that 15 year period.
Age 60 - Surviving Spouse Benefit
As mentioned above, with your personal Social Security retirement benefits, you have the option to turn on your Social Security payments as early as age 62 at a reduced amount. In contrast, if your spouse predeceases you, you are allowed to turn on the Social Security Survivor Benefit as early as age 60.
Similar to turning on your personal Social Security benefit at age 62, if you elect to receive the Social Security Survivor Benefit prior to reaching your normal retirement age, Social Security reduces the benefit by approximately 6% per year, for each year that you start receiving the benefit prior to your normal retirement age.
Advance Filing Strategy
There is an advanced filing strategy associated with the Survivor Benefit. Social Security allows you to turn on the Survivor Benefit which is based on your spouse’s earnings history and defer your personal benefit until a future date. This allows your benefit to continue to grow even though you are currently receiving payments from Social Security. When you turn age 70, you can switch over to your own benefit which is at its maximum dollar threshold. But you would only do this, if your benefit was higher than the survivor benefit.
Example: Mike and Lisa are married and are both entitled to receive $2,000 per month from Social Security at age 67. Mike passes away unexpectedly at age 50. When Lisa turns 60, she will have to option to turn on the Social Security Survivor Benefit based on Mike’s earnings history at a reduced amount of $1,160 per month. In the meantime, Lisa can allow her personal Social Security benefit to continue to grow, and at age 70, Sarah can switch from the Surviving Spouse Benefit of $1,160 over to her personal benefit of $2,480 per month.
Beware of the Social Security Earned Income Penalty
If you are considering turning on your Social Security benefits prior to your normal retirement age, you must be aware of the Social Security earned income penalty. This is true for both your own personal Social Security benefits and the benefits you may receive as the surviving spouse. In 2020, if you are receiving Social Security benefits prior to your normal retirement age and you have earned income over $18,240 for that calendar year, not only are you receiving the benefit at a permanently reduced amount but Social Security assesses a penalty at the end of the year which is equal to $1 for every $2 of income over that threshold.
Example: Jackie decides to turn on her Social Security Survivor Benefits at age 60 in the amount of $1,000 per month. She is still working and will receive $40,000 in W-2 income. Based on the formula, of the $12,000 in Social Security payments that Jackie received, Social Security would assess a $10,880 penalty against that amount. So she basically loses it all to the penalty.
For clarification purposes, when Social Security levies the earned income penalty, they do not require you to issue them a check for the dollar amount of the penalty; instead, they deduct the amount that is due to them from your future Social Security payments. This usually happens shortly after you file your tax return for the previous year because the IRS uses your tax return to determine if the earned income penalty applies.
For this reason, there is a general rule of thumb that if you have not reached your normal retirement age for Social Security and you anticipate receiving income during the year well above the $18,240 threshold, it typically does not make sense to turn on the Social Security benefits early. It just ends up creating more taxable income for you, and you end up losing most or all of the money the next year when Social Security assesses the earned income penalty against your future benefits.
Once you reach normal retirement age, this earned income penalty no longer applies. You can turn on Social Security benefits and make as much as you want without a penalty.
Divorce
We find that many ex-spouses are not aware that they are also entitled to the Social Security Survivor Benefit if they were married to the decedent for more than 10 years prior to the divorce. Meaning if your ex-spouse passes away and you were married more than 10 years, if the monthly benefit that they were receiving from Social Security is higher than yours, you go back to Social Security, file under the Survivor Benefit, and your benefit will increase to their amount.
The only way you lose this option is if you remarry prior to age 60. However, if you get remarried after age 60, it does not jeopardize your ability to claim the Survivor Benefit based on your ex-spouse’s earnings history.
If your ex-spouse was remarried at the time they passed away, you are still entitled to receive the Survivor Benefit. In addition, their current spouse will also be able to claim the Survivor Benefit simultaneously and it does not reduced the amount that you receive as the ex-spouse.
There was even a case where an individual was divorced twice, both marriages lasted more than 10 years, and he was remarried at the time he passed away. After his passing, the two ex-spouses and the current spouse were all eligible to receive the full Social Security Survivor Benefit based on his earnings history.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Understanding Required Minimum Distributions & Advanced Tax Strategies For RMD's
A required minimum distribution (RMD) is the amount that the IRS requires you to take out of your retirement account each year when you hit a certain age or when you inherit a retirement account from someone else. It’s important to plan tax-wise for these distributions because they can substantially increase your tax liability in a given year;
Understanding Required Minimum Distributions & Advanced Tax Strategies For RMD’s
A required minimum distribution (RMD) is the amount that the IRS requires you to take out of your retirement account each year when you hit a certain age or when you inherit a retirement account from someone else. It’s important to plan tax-wise for these distributions because they can substantially increase your tax liability in a given year; consequentially, not distributing the correct amount from your retirement accounts will invite huge tax penalties from the IRS. Luckily, there are advanced tax strategies that can be implemented to help reduce the tax impact of these distributions, as well as special situations that exempt you from having to take an RMD.
Age 72
LAW CHANGE: There were changes to the RMD age when the SECURE Act was passed into law on December 19, 2019. Prior to the law change, you were required to start taking RMD’s in the calendar year that you turned age 70 1/2. For anyone turning age 70 1/2 after December 31, 2019, their RMD start age is now delayed to age 72.
The most common form of required minimum distribution is age 72. In the calendar year that you turn 72, you are required to take your first distribution from your pretax retirement accounts.
The IRS has a special table called the “Uniform Lifetime Table”. There is one column for your age and another column titled “distribution period”. The way the table works is you find your age and then identify what your distribution period is. Below is the calculation step by step:
1) Determine your December 31 balance in your pre-tax retirement accounts for the previous year end
2) Find the distribution period on the IRS uniform lifetime table
3) Take your 12/31 balance and divide that by the distribution period
4) The previous step will result in the amount that you are required to take out of your retirement account by 12/31 of that year
Example: If you turn age 72 in March of 2023, you would be required to take your first RMD in that calednar year unless you elect the April 1st delay in the first year. After you find your age on the IRS uniform lifetime table, next to it you will see a distribution period of 25.6. The balance in your traditional IRA account on December 31, 2018 was $400,000, so your RMD would be calculated as follows:
$400,000 / 25.6 = $15,625
Your required minimum distribution amount for the 2023 tax year is $15,625. The first RMD will represent about 3.9% of the account balance, and that percentage will increase by a small amount each year.
RMD Deadline
There are very important dates that you need to be aware of once you reach age 72. In most years, you have to make your required minimum distribution prior to December 31 of that tax year. However, there is an exception for the year that you turn age 72. In the year that you turn 72, you have the option of taking your first RMD either prior to December 31 or April 1 of the following year. The April 1 exception only applies to the year that you turn 72. Every year after that first year, you are required to take your distribution by December 31st.
Delay to April 1st
So why would someone want to delay their first required minimum distribution to April 1? Since the distribution results in additional taxable income, it’s about determining which tax year is more favorable to realize the additional income.
For example, you may have worked for part of the year that you turned age 72 so you’re showing earned income for the year. If you take the distribution from your IRA prior to 12/31 that represents more income that you have to pay tax on which is stacked up on top of your earned income. It may be better from a tax standpoint to take the distribution in the following January because the amount distributed from your retirement account will be taxed in a year when you have less income.
Very important rule:
If you decide to delay your first required minimum distribution past 12/31, you will be required to take two RMD‘s in that following year.
Example: I retire from my company in September 2023 and I also turned 72 that same year. If I elect to take my first RMD on February 1, 2024, prior to the April 1 deadline, I will then be required to take a second distribution from my IRA prior to December 31, 2024.
If you are already retired in the year that you turn age 72 and your income level is going to be relatively the same between the current year and the following year, it often makes sense to take your first RMD prior to December 31st, so are not required to take two RMD‘s the following year which can subject those distributions to a higher tax rate and create other negative tax events.
IRS Penalty
If you fail to distribute the required amount by the given deadline, the IRS will be kind enough to assess a 50% penalty on the amount that you should have taken for your required minimum distribution. If you were required to take a $14,000 distribution and you failed to do so by the applicable deadline, the IRS will hit you with a $7,000 penalty. If you make the distribution, but the amount is not sufficient enough to meet the required minimum distribution amount, they will assess the 50% penalty on the shortfall instead. Bottom line, don’t miss the deadline.
Exceptions If You Are Still Working
There is an exception to the 72 RMD rule. If your only retirement asset is an employer sponsored retirement plan, such as a 401(k), 403(b), or 457, as long as you are still working for that employer, you are not required to take an RMD from that retirement account until after you have terminated from employment regardless of your age.
Example: You are age 73 and your only retirement asset is a 401(k) account with your current employer with a $100,000 balance, you will not be required to take an RMD from your 401(k) account in that year even though you are over the age of 72.
In the year that you terminate employment, however, you will be required to take an RMD for that year. For this reason, be very careful if you’re working over the age of 72 and leave employment in late December. Your retirement plan provider will have a very narrow window of time to process your required minimum distribution prior to the December 31st deadline.
This employer sponsored retirement plan exception only applies to balances in your current employer’s retirement plan. You do not receive this exception for retirement plan balances with previous employers.
If you have retirement account such as IRA’s or other retirement plan outside of your current employer’s plan, you will still be required to take RMD’s from those accounts, even though you are still working.
Advanced Tax Strategies
There are two advanced tax strategies that we use when individuals are age 72 and still working for a company that sponsors are qualified retirement plan.
It’s not uncommon for employees to have a retirement plans with their current employer, a rollover IRA, and some miscellaneous balance in retirement plans from former employers. Since you only have the exception to the RMD within your current employers plan, and most 401(k), 403(b), and 457 plans accept rollovers from IRAs and other qualified plans, it may be advantageous to complete rollovers of all those retirement accounts into your current employer’s plan so you can completely avoid the RMD requirement.
Strategy number two. If you are still working and you have access to an employer sponsored plan, you are usually able to make employee contributions pre-tax to the plan. If you are required to take a distribution from your IRA which results in taxable income, as long as you are not already maxing out your employee deferrals in your current employer’s plan, you can instruct payroll to increase your contributions to the plan to reduce your earned income by the amount of the required minimum distribution coming from your other retirement accounts.
Example: You are age 72 and working part time for an employer that gives you access to a 401(k) plan. Your 401(k) has a balance of $20,000 with that employer, but you also have a Rollover IRA with a balance of $200,000. In this case, you would not be required to take an RMD from your 401(k) balance, but you would be required to take an RMD from your IRA which would total approximately $7,500. Since the $7,500 will represent additional income to you in that tax year, you could turn around and instruct the payroll company to take 100% of your paychecks and put it pre-tax into your 401(k) account until you reach $7,500 which would wipe out the tax liability from the distribution that occurred from the IRA.
Or, if you have a spouse that still working and they have access to a qualified retirement plan, the same strategy can be implemented. Additionally, if you file a joint tax return, it doesn’t matter whose retirement plan it goes into because it’s all pre-tax at the end of the day.
5% or More Owner
Unfortunately, I have some bad news for business owners. If you are a 5% or more owner of the company, it does not matter whether or not you are still working for the company, you are required to take an RMD from the company’s employer sponsored retirement plan regardless. The IRS is well aware that the owner of the business could decide to work for two hours a week just to avoid required minimum distributions. Sorry entrepreneurs.
A Spouse That Is More Than 10 Years Younger
I mentioned above that the IRS has a uniform lifetime table for calculating the RMD amount. If your spouse is more than 10 years younger than you are, there is a special RMD table that you will need to use called the “joint life table” with a completely different set of distribution periods, so make sure you’re using the correct table when calculating the RMD amount.
Charitable contributions
There is also an advanced tax strategy that allows you to make contributions to charity directly from your IRA and you do not have to pay tax on those disbursements. The special charitable distributions from IRA’s are only allowed for individuals that are age 72 or older. If you regularly make contributions to a charity, church, or not for profit, or if you do not need the income from the RMD, this may be a great strategy to shelter what otherwise would have been more taxable income. There are a lot of special rules surrounding how these charitable contributions work. For more information on this strategy see the following article:
Lower Your Tax Bill By Directing Your Mandatory IRA Distributions To Charity
Roth IRA’s
You are not required to take RMD‘s from Roth IRA accounts at age 72, this is one of the biggest tax advantages of Roth IRAs.
Inherited IRA
When you inherit an IRA from someone else, those IRAs have their own set of required minimum distribution rules which vary from the rules at the age 72. The SECURE Act that was passed in 2019 split non-spouse beneficiaries of IRA into two categories. For individuals that inherited retirement accounts prior to December 31, 2019, they are still able to stretch the RMD over their lifetime and the required minimum distributions must begin by December 31st of the year following the decedent date of death. For individuals that inherited a retirement account after December 31, 2019, the New 10 Rule replaced the stretch option and no RMDs are required for non-spouse beneficiaries. For the full list of rule, deadlines, and tax strategies surrounding inherited IRA’s see the articles listed below:
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
