Social Security File-And-Suspend Strategy
August 13, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If you’re married and looking for opportunities to increase retirement income, you may want to look closely at your Social Security benefits. One opportunity for maximizing Social Security income, called “file-and-suspend,” may enable a married couple to boost both their retirement and survivor’s benefits.
What is file-and-suspend?
Generally, a husband or wife is entitled to receive a Social Security retirement benefit based either on his or her own earnings record (a worker’s benefit), or on his or her spouse’s earnings record (a spousal benefit), whichever is higher. But under Social Security rules, a husband or wife who is eligible to file for retirement benefits based on his or her spouse’s record cannot do so until his or her spouse begins receiving benefits. However, there is one exception–someone who has reached full retirement age may choose to file for retirement benefits, then immediately request to have those benefits suspended, so that his or her eligible spouse can file for spousal benefits.
File-and-suspend is a strategy that may be used in a variety of situations, but is commonly used when one spouse has much lower lifetime earnings, and thus will receive a higher retirement benefit based on his or her spouse’s earnings record. (A husband or wife’s spousal benefit may be as much as 50% of what his or her spouse is entitled to receive at full retirement age.) Using this strategy not only allows the eligible spouse with lower earnings to immediately claim a higher (spousal) retirement benefit, but can also increase the amount of available survivor protection. The spouse with higher earnings who has suspended his or her benefits can accrue delayed retirement credits at a rate of 8% per year (the rate for anyone born in 1943 or later) up until age 70. Because a surviving spouse will generally receive a benefit equal to 100% of the retirement benefit the other spouse was receiving (or was entitled to receive) at the time of his or her death, suspending a benefit to accrue delayed retirement credits may substantially increase the survivor’s benefit.
Example
Let’s look at one hypothetical example of how filing for, then suspending, Social Security benefits might help a married couple increase their retirement income and survivor’s benefits.
Henry and Julia are a married couple living in Keller, TX. Henry is about to reach his full retirement age of 66, but he wants to postpone filing for Social Security benefits. At full retirement age his monthly benefit will be $2,000, but if he waits until age 70 to file, his benefit will be $2,640 (32% more) due to delayed retirement credits. However, his wife Julia, who has had substantially lower lifetime earnings than Henry, wants to retire in a few months at her full retirement age (also 66). Based on her own earnings record, Julia will be eligible for a monthly benefit of $700, but based on Henry’s earnings record she will be eligible for a monthly spousal benefit of $1,000 (50% of Henry’s entitlement).
So that Julia can receive the higher spousal benefit as soon as she retires, Henry files an application for benefits, but immediately suspends it. That way, he can also continue to earn delayed retirement credits, which will result in a higher monthly retirement benefit for him later.
Using the file-and-suspend strategy not only increases Julia and Henry’s retirement income, but it also offers increased survivor protection. Upon Henry’s death, Julia will be entitled to receive 100% of what Henry was receiving (or was entitled to receive) at the time of his death. So by suspending his own retirement benefit in order to increase it through delayed retirement credits, Henry has ensured that Julia will receive a survivor’s benefit that is up to 32% higher for the rest of her life should he die first. (Note, though, that this hypothetical example is for illustrative purposes only and does not account for cost-of-living adjustments or taxes.)
Points to consider
- Deciding when to begin receiving Social Security benefits is a complicated decision. You’ll need to consider a number of scenarios, and take into account factors such as both spouses’ ages, estimated benefit entitlements, and life expectancies.
- Ask a financial professional to help you weigh the tax consequences of delaying Social Security income.
- Using the file-and-suspend strategy may not be advantageous when one spouse is in poor health or when Social Security income is needed as soon as possible.
- The spousal benefit will be reduced if the spouse claiming it is under full retirement age.
Social Security Workshop at Keller Public Library
August 11, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
I am conducting a free workshop on social security planning strategies at the Keller Public Library on Tuesday, August 17 at 6:30 pm. The session will cover what baby boomers need to know to maximize their retirement income. Attendees will learn:
- 5 factors to consider when deciding when to apply for benefits
- Why you should always check your earnings record for accuracy
- How to coordinate benefits with your spouse
- How to minimize taxes on Social Security benefits
- How to coordinate Social Security with your other sources of retirement income
Seating is limited, so please RSVP to library@cityofkeller.com to ensure your space.
July 2010 Personal Finance Newsletter
July 15, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The July 2010 financial planning newsletter is now available. Topics include today’s investment market conditions, low mortgage interest rates, college scholarship strategies, required minimum distributions for 2010, and a reminder on staying vigilent against identity theft. An invitation to July’s free personal finance workshop on college savings strategies at the Keller Public Library is also included. The workshop is scheduled for Tuesday, July 20 at 6:30 pm. Click here to view the newsletter.
Quoted by Jean Chatzky on Self-Employed Retirement Plans
June 2, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
I was recently quoted by Jean Chatzky on AOL’s DailyFinance.com on how the self-employed can save for retirement. While self-employed individuals do have to save more to make up for both their contributions and the employers, there are lots of great options available. Your choice of a Simple IRA, SEP IRA, Solo 401(k), or just a traditional or Roth IRA should be determined by your income, how much you want to save, your tax situation, and how much you want to contribute for any employees you have. See the full article on the Daily Finance Website.
Should you pay off the mortgage?
May 18, 2010 by Jean Keener, CRPC, CFDP · 1 Comment
One of the best financially freeing moments in life is the day you compare your savings and mortgage principal balances and realize that you could pay off your mortgage if you wanted to. If you’re at that point, congratulations! If you’re not there yet, keep saving; it can come sooner than you think.
Of course, immediately following the discovery of being able to pay off the mortgage comes a question: should I? Here’s how you decide:
First, consider what you would do with the money if you didn’t pay off the mortgage.
Would it sit in savings, be invested for long-term retirement goals, or something else? Based on your plans if you didn’t pay off the mortgage, you can estimate a rate of return you expect to receive. From this rate of return, you’ll need to subtract taxes paid on the earnings (15% if capital gains, your income tax rate if regular interest).
Second, figure out what your mortgage is costing you.
Look at your interest rate, calculate the annual interest expense, and subtract any income tax savings you’re receiving. Be sure to avoid over-estimating the benefits of tax savings. For example, if your mortgage interest is $5,000 and you have another $8,000 of itemized deductions, your total itemized deductions are $13,000. If you’re married filing jointly, the standard deduction is $11,400 this year. So the mortgage interest is only increasing your deductions by $1,600. If you’re in the 28% tax bracket, this equates to a $448 tax savings.
Third, compare your answer in step 1 with your answer in step 2.
If it’s costing you more to keep your mortgage than you would earn with the money invested or in the bank, then you should generally pay off the mortgage. If you can get a greater return on your investments than what your mortgage is costing you, then you should generally keep the money invested and wait to pay off the mortgage.
Of course there are exceptions and other considerations including:
If you would be taking the pay-off money out of a pre-tax IRA or deferred compensation in a lump sum, take a really close look at the tax consequences of that lump sum withdrawal! They can often totally cancel out any savings on the mortgage interest.
If you would be using “retirement” savings funds to pay off the mortgage, you really need to look at your retirement projections and ensure that they still work with the funds withdrawn. If your projections rely on you beginning to save what you’re currently paying on the mortgage, know yourself. Will you stick with this savings program? If not, probably best to just keep your retirement funds intact and continue paying the mortgage.
If paying off the mortgage would take your emergency funds dangerously low or short-change funds for other important goals, it’s likely not a good idea.
Making your decision
While it seems like a fairly straight-forward question, when you think about the whole picture, you realize there are lots of what-ifs and options to consider. The important thing is to take time to do your homework, complete the analysis, and seek professional assistance if needed.
Even if the process reveals you’re better off with the mortgage, you might still want to go ahead and pay it off because of the peace-of-mind benefit that comes from not having any debt. If that’s the case, by going through the process thoughtfully and thoroughly, you will know what you’re giving up financially for that peace of mind so you can make an informed decision about whether it’s worth it to you.
And if the process does show that you would be better off getting rid of that mortgage, you can move forward with confidence.
Of course, everyone’s situation is different. While the process described above addresses many considerations, you may have some issues not addressed here or that are unique to you. Make sure you fully consider your own situation before making any decision.
May 2010 Newsletter
May 10, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The May 2010 newsletter is now available. It includes investing information with perspective on last week’s market plunge and an update on the new reduced fees for trading Vanguard ETFs. For taxes, there’s information on the new 3.8% medicare tax for high income individuals. For cash flow, we cover using a Roth IRA as a back-up emergency fund. For insurance, it includes information on incorporating TX state guarantee association coverage limits and exclusions into your financial planning. Click here to read the newsletter.
Quoted on BankRate about Roth IRAs and emergency funds
April 30, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
When you’re juggling creating an emergency fund and saving for retirement, it’s important to be aware of your options. BankRate.com reporter Teri Cettina recently interviewed me about using a Roth IRA as a back-up to your primary emergency fund. A Roth IRA should not be your primary emergency fund, but it can provide a useful supplement that can help you work toward both retirement and emergency fund goals simultaneously. You need to understand the pros and cons of the strategy and make sure it really makes sense for you. Also be aware that Roth contributions are not treated the same as funds converted to a Roth. You can see Teri’s full article on BankRate.com.
April 2010 Monthly Newsletter
April 15, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
The April 2010 monthly newsletter is now available. It includes information on how the new healthcare law may affect you as an individual and new student loan and financial aid provisions. Also covered are an investment market update and a discussion on the merits of dollar cost averaging to make investments vs. lump-sum investing. Please click here to view the full newsletter.
Keller Public Library Free Retirement Workshop
March 29, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
Your Retirement Savings Game Plan
Free Workshop at Keller Public Library on Tuesday, April 20 at 6:30 pm.
Designed for individuals and couples who are pre-retirement, we will cover how much you need to save for retirement and the best types of accounts to use for different situations for investment options and tax efficiency. We will also go through some worksheets to determine if you are on track with your current level of retirement savings. Space is limited and registration is encouraged to ensure your space. RSVP to tchiv@cityofkeller.com.Non-Deductible IRA Contributions: Good Idea?
March 25, 2010 by Jean Keener, CRPC, CFDP · Leave a Comment
If your income is over the limit for deductible and Roth IRA contributions, you are faced with a dilemma each year: should you contribute to a non-deductible IRA? Making a non-deductible contribution shouldn’t be an automatic decision. It could be beneficial, or investing the same amount of money in a taxable account could be a superior choice.
Like most decisions in personal finance, there’s not one right answer for everyone.
Non-Deductible IRA contribution benefits:
- Your earnings grow on a tax-deferred basis. This means that you can reinvest all of your dividends and capital gains without paying taxes on them as you go. You are also free to buy, sell, and rebalance investments in your account without tracking each investment’s cost basis, gain, or loss for income tax purposes.
- There’s a psychological benefit to putting money in a retirement account for many people – you may be less likely to tap into the funds if you know there would be penalties.
- Non-deductible contributions create Roth conversion opportunities with less tax owed than if the entire conversion were pre-tax.
Non-deductible IRA contribution drawbacks:
- Your earnings when withdrawn will be taxed at regular income tax rates rather than capital gains tax rates. Right now capital gains rates are 15% for those in the 25% and higher tax brackets and are scheduled to go to 20% next year. So if you’re instead paying 35% or higher income tax on the withdrawals, that’s a big hit.
- Loss of flexibility – if you withdrawal the funds before 59 ½, you will be subject to penalties unless you qualify for an exception.
So how do you decide if it makes sense for you?
First – Consider what your tax bracket is pre-retirement and what it will likely be in retirement.
To do this, you or your financial planner will need to consider your likely sources of income in retirement and their tax status. You also need to make some assumptions about future tax rates — of course no one has a crystal ball, so an educated guess is the best you can do with this aspect.
- If you think your tax bracket will be the same, higher, or just slightly lower in retirement, then non-deductible contributions are likely not a good move for you (unless one of the other benefits applies).
- If your tax bracket will be a lot lower in retirement – like moving from 28% to 15%, then non-deductible contributions should definitely be considered.
After you’ve answered the first question, then you should consider possible Roth IRA conversion opportunities. If you don’t have other assets in traditional or roll-over IRAs, you can make non-deductible contributions and convert them to Roth IRAs with only taxes owed on the growth between contribution and conversion. This can be a very beneficial technique to get assets into a Roth IRA even when your income exceeds the Roth contribution limits. There are very specific rules for conversions, so it’s important to consult with your financial or tax advisor to make sure you follow them correctly.
Lastly, if your decision still isn’t clear, consider the loss of flexibility. Depending on your money personality, this can be a positive or a negative. The positive is less temptation to tap into retirement funds early. The negative is the penalties for doing so. You need to know yourself and know whether the loss of flexibility is good or bad for your situation.
Bottom line, don’t put your non-deductible IRA contribution on auto-pilot. It’s important to do the analysis because your decision can affect how quickly your assets grow and how much income you have in retirement.