Social Security: Suspending Payments vs. Withdraw of Benefits Election

If you have started receiving your social security benefits but you now want to suspend receiving your social security payments going forward, you have two options available to you.  You can either:

1. Suspending Your Social Security Benefit

2. Withdrawing Your Social Security Benefit

They seem like the same thing, but they are two completely different strategies.  One option requires you to pay back the social security benefits already received; the other does not.   One option has an age restriction; the other does not. 

Some of the most common reasons why retirees elect to either suspend or withdraw their social security benefits are:

• Retirees either take on either part-time or full-time employment or receives an inheritance, they no longer need their social security benefit to supplement their income, and they would prefer to allow their social security benefit to keep growing by 6% - 8% per year.

• A retiree turns on their social security prior to Full Retirement Age, begins making income over the allowable social security threshold, and is now faced with the social security earned income penalty

• Since social security benefits are taxable income to many retirees, by suspending their social security payments, it opens up valuable tax and wealth accumulation strategies. We will cover a number of those strategies in this article.

Social Security: Withdraw of Benefits

The Withdraw of Benefits option is ONLY available if you started receiving your social security benefits within the past 12 months. If you are reading this article and you started receiving your social security benefits more than a year ago, you are not eligible for the withdraw of benefits strategy (however, you may still be eligible for a suspension of benefits covered later). 

You can withdraw your benefits at any age: 62, 64, 68, etc. We find that the Withdrawal of Benefits strategy is the most common for retirees that retired before their Social Security Full Retirement Age (FRA), turned on their SS benefits early, began working again, and make more income than they expected. They realize very quickly that this scenario can have the following negative impacts on their social security benefits:

1. They may incur an Earning Income Penalty which claws back some of the social security benefits that they received.

2. A larger percentage of their social security benefit may be subject to taxation

3. They may have to pay a higher tax rate on their social security benefits

4. By turning on their social security early, they permanently reduced the amount of their social security benefit. Had they known they would earn this extra income, they would have waited and allowed their social security benefit to continue to grow.

You Must Repay The Social Security Benefits That You Received

Since the Withdrawal of Benefits option is the truest “Do-Over” option, you, unfortunately, must return to social security all of the benefit payments you received within the last 12 months. If you received $1,000 per month for the past 10 months and you file a Form SSA-521, you will be required to return the $10,000 that you received to social security.  However, in addition to returning the social security benefits that you received, you also have to return the following:

• Payments made to your spouse under the 50% spousal benefit

• Payments to your children made under the dependent benefit

• Voluntary federal and state taxes that were withheld from your social security payments

• Medicare premiums that were withheld from your social security payments

This is why this option is the purest “do-over.”   Once you have filed the Withdraw of Benefits and repaid social security the required amount, it’s like it never happened.   

One Lifetime Withdrawal

To prevent abuse, you are only allowed one “Withdraw of Benefits” application during your lifetime. 

How To Apply For A Social Security Withdraw of Benefits

You can apply to withdraw your benefits by mailing or hand-delivering form SSA-521 to your local social security office.  Once Social Security has approved your withdrawal application, you have 60 days to change your mind.

Suspending Your Social Security Benefits

Now let’s shift gears to the second strategy, which involves voluntarily suspending your social security benefits.  Why is a “Suspension” different than a “Withdrawal of Benefits”?

1. You are only allowed to “suspend” your social security benefits AFTER you have reached Full Retirement Age (FRA).  For anyone born 1960 or later, that would be age 67.   Suspending your benefit is not an option if you have not yet reached your social security full retirement age.

2. You do not have to repay the social security benefits you already received.

By suspending your benefits, the monthly payments cease as of the suspension date, and from that date forward, your social security benefit continues to grow at a rate of 8% per year until the maximum social security age of 70. 

Restarting Your Suspended SS Benefits

If you decide to suspend your social security benefits, you can elect to turn that back on at any time. For example, you retire at age 67 and turn on your social security benefit of $2,000 per month, but then your friend approaches you about a consulting gig that will pay you $40,000 only working 2 days a week. You no longer need your social security benefits to cover your expenses, so you contact your local social security office and request that they suspend your benefits.  A year later, the consulting gig ends; you can go back to the social security office, and request that they resume your social security payments which have now increased by 8% and will now be $2,160 per month. 

How Do You Suspend Your Social Security Benefits?

You can request a suspension by phone, in writing, or by visiting your local social security office.

Reasons To Consider Suspending Your Social Security Benefit

As financial planners, we work with clients to identify wealth accumulation strategies, some basic and some more advanced. In this section I’m going to share with you some of the situations where we have advised clients to suspend their social security benefits:

Income Not Needed:  This one we already cover in the example but if a client finds that they don’t need their social security income to meet their expenses, stopping the benefit, and taking advantage of the 8% guaranteed increase in the benefit every year until age 70 is an attractive option.   I’m not aware of any investment options at this time that offers a guaranteed 8% rate of return.

Increasing The Survivor Benefits: By suspending your social security benefit, if your social security benefit is higher than your spouse’s benefit, you are increasing the social security survivor benefit that would be available to your spouse if you pass away first.  When one spouse passes away, only one social security payment continues, and it’s the higher of the two.

Reduce Taxable Income:  Retirees are often surprised to find out that up to 85% of the social security benefits received could be taxed as ordinary income at the federal level and there are a handful of states that tax social security at the state level.  If there is temporary income right now that will sunset, instead of your social security benefit being stacked on top of your other taxable income, making it subject to higher tax rates, it may be beneficial to suspend your social security benefit until a later date.

Roth Conversions:  Roth conversions can be a fantastic long-term wealth accumulation strategy in retirement but what makes these conversions work, is after you have retired, most retirees are in a lower tax bracket which allows them to convert pre-tax retirement accounts to a Roth IRA, and realize those conversions at a low tax rate. However, as I just mentioned, social security is taxable income, by suspending your social security benefit, and removing that taxable income from the table, it can open up room for larger Roth conversions.

Reduce Future RMDs:  For pre-tax IRAs and 401(k), once you reach either 73 or 75 depending on your date of birth, the IRS forces you to start taking taxable required minimum distributions (RMDs) from those retirement accounts.   It’s not uncommon for retirees with pensions to retire, they turn on their pension payment and social security payments, and that is more than enough to meet their retirement income needs. However, often times these retirees also have pre-tax retirement accounts that they do not need to take withdraws from to supplement their income so the plan is to just let them continue to accumulate in value.

The problem becomes, if no distributions are taken from those accounts, the balances continue to grow, making the RMDs larger later on, which could make those distributions subject to higher tax rates.  Instead, it may be a better strategy to suspend your social security benefits which would allow you to start taking distribution from your pre-tax retirement accounts now, in an effort to reduce the future RMD amounts.

Life Expectancy Protection: With everyone living longer, there is the risk that a retiree could outlive their personal retirement savings but social security payments last for the rest of your life. By suspending your social security benefit and receiving the 8% per year increase, your social security benefit will support a larger percentage of your annual expenses.  Also, unlike IRA accounts, social security receives a COLA (cost of living adjustment) each year which increases your social security benefit for inflation.  By delaying the benefit, the COLA is now being applied to a higher social security benefit.

Choosing Between Withdraw or Suspend

If you have already reached FRA and you turned on your social security benefit less than 12 months ago, you have the option to either “Suspend” your benefit or “Withdraw” your benefit. 

 If you suspend your benefit, you do not have to pay back any of the social security benefits that you already received, and your social security benefit will continue to accumulate at 8% per year until you elect to turn your social security back on.

If instead, you decide to withdraw your benefit, yes, you have to pay back any social security payments that you already received but there is one advantage.  Since the withdrawal of benefits is a complete “do-over”, you received credit for the 8% per year increase all the way back to your start date.  This is not the case with the suspend strategy.  If a client has $20,000 in idle cash and they received $20,000 in social security benefits over the past 11 months, if they use their $20,000 to pay back social security, it’s like you are receiving an 8% return on that $20,000 because your social security will be 8% a year from your start date.  Not a bad return on your idle cash.

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.

Turn on Social Security at 62 and Your Minor Children Can Collect The Dependent Benefit

Not many people realize that if you are age 62 or older and have children under the age of 18, your children are eligible to receive social security payments based on your earnings history, and it’s big money.  However, social security does not advertise this little know benefit, so you have to know how to apply, the rules, and tax implications.  In this article, I will walk you through the following:

• The age limit for your children to be eligible to receive SS benefits

• The amount of the payments to your kids

• The family maximum benefit calculation

• How the benefits are taxed to your children

• How to apply for the social security dependent benefits

• Pitfall: You may have to give the money back to social security…..

Eligibility Requirements for Dependent Benefits 

Three requirements make your children eligible to receive social security payments based on your earnings history:

1. You have to be age 62 or older

2. You must have turned on your social security benefit payments

3. Your child must be unmarried and meet one of the following eligibility requirements:

• Under the age of 18

• Between the ages of 18 and 19 and a full-time student K – 12

• Age 18 or older with a disability that began before age 22

How Much Does Your Child Receive?

If you are 62 or older, you have turned on your social security benefits, and your child meets the criteria above, your child would be eligible to receive 50% of your Full Retirement Age (FRA) Social Security Benefit EVERY YEAR, until they reach age 18.   This can sometimes change a parent’s decision to turn on their social security benefit at age 62 instead of waiting until their Full Retirement Age of 67 (for individuals born in 1960 or later).  But it gets better because the 50% of your FRA social security benefit is for EACH child.  

For example, Jim is retired, age 62, and he has one child under age 18, Josh, who is age 12.  If he turns on his social security benefit at age 62, he would receive $1,200 per month, but if he waits until his FRA of 67, he would receive $1,700 per month.  Even though Jim would receive a lower social security benefit at age 62, if he turns on his benefit at age 62, Jim and his child Josh would receive the following monthly payments from social security:

Jim: $1,200  ($14,400 per year)

Josh: $850  ($10,200 per year)

Even though Jim receives a reduced SS benefit by turning on his benefit at age 62, the 50% dependent child benefit is still calculated based on Jim’s Full Retirement Age benefit of $1,700.  Josh will be eligible to continue to receive monthly payments from social security until the month of his 18th birthday.   That’s a lot of money that could go towards college savings, buying a car, or a down payment on their first house.

The Family Maximum Benefit Limit

If you have 10 children, I have bad news; social security imposes a “family maximum benefit limit” for all dependents eligible to collect on your earnings history.  The family benefits are limited to 150% to 188% of the parent’s full retirement age benefit.

I’ll explain this via an example.   Let’s assume everything is the same as in the previous example with Jim, but now Jim has four children, all under 18.  Let’s also assume that Jim’s Family maximum benefit is 150% of his FRA benefit, which would equal a maximum family benefit of $2,550 per month ($1,700 x 150%).  We now have the following:

Jim:  $1,200

Child 1:  $850

Child 2:  $850

Child 3:  $850

Child 4:  $850

If you total up the monthly social security benefits paid to Jim and his children, it equals $4,600, which is $2,050 over the $2,550 family maximum benefit limit. 

Always Use Your FRA Benefit In The Family Max Calculation

Here is another important rule to note when calculating the family maximum benefit, regardless of when your file for your social security benefits, age 62, 64, 67, or 70, you always use your Full Retirement Age benefit when calculating the Family Maximum Benefit amount. In the example above, Jim filed for social security benefits early at age 62. Instead of using Jim’s age $1,200 social security benefit to calculate the remaining amount available for his children, Jim has to use his FRA benefit of $1,700 in the formula before determining how much his children are eligible to receive.

Social security would reduce the children’s benefits by an equal amount until their total benefit is reduced to the family maximum limit.

These are the steps:

1. Jim Max Family Benefit = $1,700 (FRA) x 150% = $2,550

2. $2,550 (Family Max) - $1,700 (Jim FRA) = $850

3. Divide $850 by Jim’s 4 eligible children = $212.50 for each child

This results in the following social security benefits paid to Jim and his 4 children:

Jim:  $1,200

Child 1:  $212.50

Child 2:  $212.50

Child 3:  $212.50

Child 4:  $212.50

A note about ex-spouses, if someone was married for more than 10 years, then got divorced, the ex-spouse may still be entitled to the 50% spousal benefit, but that does not factor into the family maximum calculation, nor is it reduced for any family maximum benefit overages.

Social Security Taxation

Social security payments received by your children are considered taxable income, but that does not necessarily mean that they will owe any tax on the amounts received. Let me explain, your child’s income has to be above a specific threshold before they owe any federal taxes on the social security benefits they receive. 

You have to add up all of their regular taxable income and tax-exempt income and then add 50% of the social security benefits that they received.  If your child has no other income besides the social security benefits, it’s just 50% of the social security benefits that were paid to them.    If that total is below $25,000, they do not have to pay any federal tax on their social security benefit.  If it’s above that amount, then a portion of the social security benefits received will be taxable at the federal level.

States have different rules when it comes to taking social security benefits.  Most states do not tax social security benefits, but there are about 13 states that assess state taxes on social security benefits in one form or another, but our state New York, is thankfully not one of them.

You Can Still Claim Your Child As A Dependent On Your Tax Return

More good news, even though your child is showing income via the social security payment, you can still claim them as a dependent on your tax return as long as they continue to meet the dependent criteria.

How To Apply For Social Security Dependent Benefits

You cannot apply for your child’s dependent benefits online; you have to apply by calling the Social Security Administration at 800-772-1213 or scheduling an appointment at your local Social Security office.

Be Care of This Pitfall

There is one pitfall to the social security payment received by your child or children, it’s not a pitfall about the money received, but the issue revolves around the titling of the account that the social security benefits are deposited into when they are received on behalf of the child. 

The premise behind social security providing these benefits to the minor children of retirees is that if someone retires at age 62 and still has minor children as dependents, they may need additional income to support the household expenses.  Whether that is true or not does not prevent you from taking advantage of these dependent payments to your children, but it does raise the issue of the “conserved benefits” letter that many people receive once the child turns age 18. 

You may receive a letter from social security once your child is 18 instructing you to return any of the social security dependent payments received on your child’s behalf and saved.  So wait, if you save this money for our child to pay for college, you have to hand it back to social security, but if you spend it, you get to keep it?   On the surface, the answer is “yes,” but it all depends on who is listed as the account owner that the social security payments are deposited into on behalf of your child.

If the parent is listed as an owner or joint owner of the account, you are expected to return the saved or “conserved” payment to the Social Security Administration.  However, if the account that the social security payments are deposited into is owned 100% by your child, you do not have to return the saved money to social security. 

Then I will get the question, “Well, what type of account can you set up for a 12-year-old that they own 100%?”  Some banks will allow you to set up savings accounts in the name of a child at age 14, UTMA accounts can be set up at any age, and they are considered accounts owned 100% by the child even though a parent is listed as a custodian.

Watch out for the 529 account pitfall. For parents that want to use these Social Security payments to help subsidize college savings, they will sometimes set up a 529 account and deposit the payments into that account to take advantage of the tax benefits.  Even though these 529 accounts are set up with the child listed as the beneficiary, they are often considered assets of the parents because the parent has control over the distributions from the account.   However, you can set up 529 accounts as UTMA 529, which avoids this issue since the child is now technically the owner and has complete control over the assets at the age of majority.

FAFSA Considerations

Be aware that if your child is college bound and you expect to qualify for need-based financial aid, assets owned by the child count against the FAFSA calculation. The way the calculation works is that about 20% of any assets owned by the child count against the need-based financial aid that is awarded.  There is no way around this issue, but it’s not the end of the world because that means 80% of the balance does not count against the FAFSA calculation and it was free money from Social Security that can be used to pay for college. 

Social Security Filing Strategy

If you are age 62 or older and have minor children, it may very well make sense to file for Social Security early, even though it may permanently reduce your Social Security benefit once you factor in the Social Security payments that will be made to your children as dependents.  But, you have to make sure you understand how Social Security is taxed, the Security earned income penalty, the impact of Social Security survivor benefits for your spouse, and many other factors before making this decision. 

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.

Social Security Income Penalties Are Refunded To You When You Reach Fully Retirement Age

If you decide to turn on your Social Security payments before your full retirement age, the IRS has something called the Social Security Earnings Test where they assess a penalty if you make over a specified amount during that tax year.  For 2022, that amount is $19,560 and the penalty is $1 for every $2 you earn over that threshold, but not many taxpayers realize that Social Security actually refunds you the penalty amounts once you reach full retirement age.  In this article, I will walk you through:

•  Social Security Full Retirement Age Based on Date of Birth

• Social Security Earnings Test

• How they assess the Social Security earnings penalty

• How does Social Security refund you the penalties paid when you reach full retirement age

• Other social security filing considerations

Social Security Full Retirement Age

As I mentioned in the intro, if you turn on Social Security PRIOR to your Full Retirement Age (“FRA”) and you continue to work, you are subject to the SS earnings test and possible penalties.  Your SS full retirement age varies based on your date of birth:

The final column in the chart above shows the permanent reduction in your social security benefit if you turn on your SS benefit at age 62.  If you plan to turn on your social security prior to your full retirement age and you plan to continue to work, you have to be careful with this decision.  Not only are you permanently reducing your SS benefit, but you are also subject to the Social Security earnings test.

Once you reach Full Retirement Age, the SS earnings test goes away, you can make as much money as you want, and social security does not assess a penalty.

Social Security Earnings Test

Here’s how the social security earnings test works. If you turn on your SS benefit prior to full retirement age and you make more than $19,560 in 2022, SS will assess a penalty of $1 for every $2 you earn over that limit (50% penalty).  The IRS increases the income threshold a little each year.  Let’s look at the example below:

•  You are age 63

• Your monthly social security benefit is $1,000 ($12,000 annually)

• You made $23,560 in earned income in 2022

In the example above, you earned $4,000 in income above the limit ($23,560 - $19,560 = $4,000).    Social Security will assess a penalty of $2,000 ($4,000 x 50%). 

How Do You Pay The Social Security Earned Income Penalty?

Let’s keep building on the previous example, you failed the earnings test, and you owe the $2,000 penalty, how do you pay it?  The good news is you don’t have to write a check for it, instead social security will withhold your social security payments the following year until you have satisfied the penalty.  In the example above, your monthly SS benefit was $1,000 and you had a $2,000 penalty. Social security will withhold two of your monthly SS payments the following year and then your monthly social security payment will resume as normal.    

The math for this example came out easy, 2 months exactly, but what if your monthly benefit is $1,000 and the penalty is $2,400, which would be 2.4 months of benefit payments.  Social security rounds UP all fractional months, so they would withhold 3 full months of your social security payments even though that means they are withholding $3,000 to pay back a $2,400 penalty. The additional $600 that they withheld will be refunded back to you when they process the refund of the earned income penalty at your full retirement age.

Social Security Does Refund You The Penalties At Full Retirement Age

If social security withheld some of your monthly payments due to a failed earnings test prior to reaching your FRA, the good news is, once you reach full retirement age, social security refunds those penalties back to you.  Unfortunately, they do not just send you a check for the dollar amount of all of those missed payments, instead, upon reaching full retirement age, they recalculate you monthly social security payment taking into account those missed payments. 

The easiest why to explain the refund calculation is via an example:

• Your SS full retirement age is 67

• You turned on your SS payment at age 62

• Your monthly SS benefit payments are $2,000

• Every year you made $8,000 over the SS earnings test limit

• This resulted in a $4,000 earned income penalty each year

• SS withheld 2 months of your benefit payments each year to assess the penalty

• 2 months x 5 years of SS payments = 10 months of missed payments  

Between age 62 and reaching age 67 social security withheld a total of 10 months of your social security payments.  Upon reaching FRA 67, instead of continuing your monthly benefit at $2,000, they credit you back those 10 months of payments, by recalculating your social security benefit assuming you originally turned on your SS benefit at age 62 & 10 months instead of age 62 & 0 months.  This reduces the amount of the permanent penalty that you incurred for turning on your social security benefit prior to full retirement age, and you will receive a slightly higher social security benefit for the rest of your life to repay you for those earned income penalties that were assessed prior to full retirement age. It may take you a number of years to recoup those penalty payments but how long you live will ultimately determine whether this refund calculation benefits you or the social security system.

Other Considerations Before Turning on Your SS Benefit Early

After reading this article, it may seem like a no-brainer to turn on your SS benefit early, if you earn to much in a given year, and get assess a penalty, so what, you just get the money back later, but it’s important to understand that there are other factors that you need to take into consideration before turning on your social security benefits early which include:

• The impact on the survivor benefits for your spouse

• The breakeven age of turning on the benefits early versus waiting

• How social security benefits are taxed

• Taking advantage of the automatic increase in the amount of the benefit each year

• The 50% spousal benefit

• Your life expectancy

Here is our article on Social Security Filing Strategies covering these other considerations.

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.