Social Security payback option may disappear

By Mary Beth Franklin
Sunday, August 29, 2010

A little-known strategy that allows Social Security recipients to boost their income by repaying benefits received in earlier years and then claiming a bigger monthly check based on their greater age may soon disappear. The Social Security Administration (SSA) is moving to eliminate the do-over strategy. If the agency gets its way, the rule could take effect within months.

If you or someone you know might benefit from the payback strategy, now is the time to consider it and come to a decision. Putting it off could mean letting the government make the decision for you -- by eliminating the opportunity.

Retirees can collect Social Security benefits as early as age 62, but monthly payments are reduced by 25 percent compared with what they would be if claimed at full retirement age, which is 66 for those who claim benefits this year. Those who are willing to wait past age 66 can boost their benefits by 8 percent for every year they delay, up to age 70, increasing annual benefits to 132 percent of their base amount.

Maybe you decided to collect early just because you could, but now you regret your decision and wish you had held out for a bigger monthly check. To get one, you must first file Internal Revenue Service Form 521 at your local Social Security office.

Your retirement benefits will stop almost immediately, and if your spouse receives benefits based on your work record, his or her benefits will stop, too. Then the SSA will send you a letter telling you how much you need to repay (including any spousal benefits). That process may take several weeks or even months. Once you repay the benefits -- which can top $100,000 -- you can reapply for a higher payment based on your current age, locking in a larger base amount for future cost-of-living adjustments and maximizing lifetime benefits for a surviving spouse.

In 2007, about 500 people -- out of more than 37 million retirees and their dependents receiving benefits -- took advantage of the payback option. By 2009, the number had nearly doubled as more retirees learned how they could repay their benefits, interest- and penalty-free, and restart them at a higher level. As a bonus, those who repay benefits can claim a tax credit or a tax deduction -- whichever results in a bigger tax break -- for any income taxes paid on the benefits as they received them.

Under the proposed rule, retirees would be allowed to withdraw their application for Social Security benefits only once during their lifetime and only within 12 months of when they began receiving benefits. If they changed their mind within the first year, they could stop their benefits, pay back what they had received and restart them later at a higher level based on their age at that time. But once that 12-month deadline passed, they would no longer be able to repay benefits to "buy" a higher benefit later. The federal government's Office of Management and Budget has the final say.

-- Kiplinger's Personal Finance


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