Image source: Akaisha and Billy Kaderli.
Social Security has many complex provisions, and smart retirees have used some of those provisions over the years to create useful strategies to enhance their retirement income. One of those strategies is called file and suspend, and late last year, lawmakers identified the strategy as offering a loophole that they didn't want to leave open. As a result, the file-and-suspend strategy will disappear soon, but there's still an opportunity for some people to take advantage of the strategy before it goes away.
How the file-and-suspend strategy works
The idea behind using the file-and-suspend strategy was relatively simple. Under the laws governing Social Security, your spouse isn't entitled to receive any spousal benefits based on your work history until you decide to file for your own retirement benefits. This isn't a problem as long as you want to take your benefits now. However, many people would prefer to defer taking retirement benefits until a later date, letting them earn delayed retirement credits and boost their eventual monthly payments.
The file-and-suspend strategy allowed couples to get the best of both worlds. Under the filing part of the strategy, you would file for your benefits, thereby activating spousal benefits for your spouse. However, you would then immediately suspend your retirement benefits. The old rules allowed you to keep earning delayed retirement credits during the period of suspension. The net result was that one spouse could get benefits now, and the other could wait and get larger benefit checks later.
Why the file-and-suspend strategy is going away
Late last fall, lawmakers agreed to do away with the file-and-suspend strategy, characterizing it as an unintended loophole. Once the law goes into effect, if you suspend your benefits, your spouse will no longer be able to get spousal benefits based on your work history. That means that in order to activate spousal benefits, you'll have to file and actually receive your retirement benefits, and you won't be able to earn delayed retirement credits once you file.
The law's effective date was set for six months after its passage. That works out to May 1, and because that's a Sunday, most planners are recommending that people take action by April 29.
The problem is that you're not eligible to file and suspend until you reach full retirement age, which is currently 66. Those who won't have turned 66 by the late-April deadline therefore won't have any opportunity to get the benefits of the file-and-suspend strategy.
However, if you are eligible, then you'll be able to enjoy the advantages of filing and suspending even after the effective date of the law. Grandfathering provisions will allow your spouse to receive spousal benefits even if you've suspended your benefits -- as long as you did so before the deadline. If you decide to unsuspend your benefits after the deadline, then that's a one-time decision, and you won't be able to unmake it.
What you can still use file and suspend for
Even after the new law takes effect, there are still situations in which filing and suspending benefits can make sense. The most common is if you filed for early benefits and later decide that you would prefer to have largely monthly payments, you can suspend those benefits once you reach full retirement age. You can then earn delayed retirement credits that will boost your benefit when you decide to start taking it again. Given that many people regret their decision to take early Social Security, this is an option that has some value.
Still, the main reason why most people used file and suspend will no longer work once May comes. At that point, the strategy will simply be the latest in a series of things people did to enhance their retirement income.
