Last week I told you a story about how my Mom and Dad used a government loophole to earn an extra couple of thousand dollars a year in social security benefits. A lot of people have emailed me over the last seven days to ask if it was legal to pull off such a feat. They assumed anything that extraordinary and financially beneficial had to be against the law or dishonest. I assured them this practice is 100% legal and legitimate!
There are actually five loopholes that the government does not want me to tell you about that can boost your social security benefits by thousands of dollars per year. While the government does not publicize these loopholes they do honor anyone who takes advantage of them.
For those of you that may not remember let me give you a quick overview of the loophole I explained last week. This one benefits a husband and wife who both worked over the years and qualify for social security. In this scenario one member of the couple significantly out earned the other, qualifying them for a larger benefit check than their spouse. Both spouses are eligible to start receiving benefits as early as age 62, however if they wait until full retirement age, 65, their benefits increase. You can do one even better by holding off on collecting social security till age 70 and maximizing the amount of money you receive each month, which will increase your benefit by a whopping 75 percent from what you would begin collecting at age 62.
If the lower income earning spouse waits until their full retirement age (65) to collect a spousal benefit, they are eligible to receive benefits equal to half of the higher income earning spouse’s benefit. This allows the benefits of the lower income earning spouse to grow until they reach the max benefit level which occurs at age 70. If at that point the lower income earning spouse’s max benefits exceed their current spousal benefits they can switch to their own social security benefits. The financial loophole is genius for two reasons, one it allows the lower income earning spouse to increase their benefits to the maximum level ensuring they receive larger monthly checks for the rest of their lives. And two because it allows them to collect a spousal benefit check as bonus money while they wait. Amazing!
The only problem with this strategy is that to collect spousal benefits the higher income earning spouse has to have applied for benefits too. This strategy wasn’t always possible, it was only made legal in 2000 with the Senior Citizens’ Freedom to Work Act. Under this law, the government allows the higher earning spouse to “file and suspend,” which allows the lower income earning spouse to collect benefits equal to half of the higher income earning spouse while suspending their own benefits and allowing them to grow to their maximum level achieved at age 70.
This “file and suspend” strategy would also work out well financially for couples that had similar income levels at the peak of their careers. In this situation one spouse would apply for social security at normal retirement age (65) and immediately suspend their benefits. This allows the spouse who filed benefit’s to continue to grow 8 percent a year. It also allows the other spouse to collect the spousal benefit which is equal to half of the full benefit of spouse who filed.
Let me put this in perspective for you. Let’s say a man and his wife both retire at their full retirement age of 65. Since each earned about the same amount during their working careers, each is entitled to retirement benefits of $1500 a month. One spouse can file and suspend their benefits, allowing it to continue growing to the max level which is achieved at age 70. The other spouse can then apply for spousal benefits and get half of that amount, which would give them $750 in this case. At age 70 the spouse who suspended his benefits can re-apply which would increase the benefit amount to its max level of about $2,000 a month. This allows the couple to take income for five years and still receive the maximum benefit at age 70. In essence, they gain $45,000 ($750 x 12 months equals $9,000 a year. $9,000 a year times 5 years equals $45,000) plus the higher benefit amount each month. Not too shabby!
Of course not every couple had a dual income. Some had a spouse that never paid into the social security system, essentially they were a stay at home spouse. In this instance someone who has never paid into Social Security is only eligible for spousal benefits, which is half of their partner’s benefits. To show you how this works let’s say that the income earning spouse is eligible to receive $2,500 a month starting at age 65. In this instance the stay at home spouse is entitled to half of that amount which is $1250 a month. So for five years the couple earns $1250 a month while allowing the income earning spouse’s benefits to balloon up to the maximum amount achieved at age 70, which works out to be around $3,400 a month in this case. This loophole allows the couple to collect an additional $75,000 ($1250 a month x 12 months equals $15,000 a year. $15,000 a year times 5 years is $75,000) and collect higher monthly benefits for the income earning spouse at age 70. Genius!
Perhaps the most shocking (and most financially beneficial) loophole allows an individual to obtain an interest free loan from the government for one year. Let me explain how this works. The government will allow you to begin collecting social security benefits at whatever age you choose and then halt your benefits within 12 months of filing, pay back all that you have collected (including spousal benefits) interest free and reset your benefits at the new, higher rate. No other entity will allow you to borrow just over $40,000 (the maximum benefit for a 70 year old) interest free for a year!
Your children can benefit too. These social security loopholes aren’t just for husbands and wives; they can also aid retiree’s children. If you retire and still have minor children (kids under age 18) at home they can collect social security benefits that are equal to half of your full retirement age benefits. So say you retire at age 65 and have an 12 year old son or daughter living with you. At that age you may qualify for social security benefits of $1500 a month. Based on your work record your 12 year old son or daughter can collect $750 a month legally. Best of all this does not affect your spouse’s ability to collect spousal benefits which would net you an additional $750. This scenario is most common among older men who are widowers or divorced who go on to remarry younger women and start another family.
This loophole can be extremely advantageous if you invest the money your child earns before they turn 18. For example you could invest your child’s social security benefits in a state sponsored 529 college savings plan. This will allow the retiree to use the earnings and distributions tax free to pay for their child’s college tuition, fees, books and any other qualified expense. Plus depending on where you live, you may also qualify for a state income tax deduction on your 529 contribution. Double bonus!
There is no reason to feel guilty about collecting higher social security benefit checks each month as each of these five loopholes are completely legitimate and recognized by the government. They are 100 percent legal and honest! For decades only a select few knew about the loopholes that have netted people thousands of extra dollars per year. Usually it’s only the rich who use these strategies to increase their wealth. Now you can use the same techniques the 1 percent are using and retire in riches!
Keeping Money in Your Pocket,