Retirement Loophole: How to Get an Interest Free Loan from Uncle Sam

A common question for older Americans is what age they should choose to start receiving social security benefits. The government allows you to decide what age is best for you. You can start receiving benefits as early as age 62, as late as age 70, or any age in between. The normal retirement age is age 66 for Americans born between 1943 and 1954. It goes up incrementally from there, up to age 67 for those born 1960 and after.

If you would have asked me last week what age Americans should choose to start receiving social security I would have said age 70. It’s best to delay taking benefits for as long as possible to ensure you maximize your monthly social security payment. But now I’ve found a reason to argue against waiting so long. There is a social security loophole that’s been benefiting wealthy Americans for decades that I’d like to share with you today.

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What would you say if someone offered you a loan for thousands of dollars interest free? You’d say “Where Do I Sign Up?” wouldn’t you?

45% of Americans choose to begin receiving social security benefits at age 62, the first year you’re legally eligible to do so. When you do this your monthly benefit checks are reduced by 25-30%. So if full benefits at age 67 are $1,000 a month, Americans who are 62 and receiving benefits would only get $700-750 a month, a significant drop.

The reason I argued to hold off collecting social security for as long as possible is because the amount you’d get is significantly higher. Using the previous example of full benefits being $1,000 a month at age 67, if you wait until age 70 to begin collecting benefits you’d receive 32% more money or $1320 per month. That’s a monthly $570 increase, a significant amount.

Based on these numbers it’s easy to see the benefits of holding off as long as possible to collect your social security benefits. But you don’t have to wait till age 70 to get the maximum amount of benefits. You can start receiving reduced benefits at age 62 and change your mind at any time before your 70th birthday to get the maximum benefits. You must repay the money Uncle Sam has given you over the years, but you do so without incurring any penalties. Any interest you’ve earned on the money you’ve received is yours to keep free of charge. You even get a credit or a deduction on the taxes you paid on the money you received! It’s essentially an interest free loan for up to eight years.

The strategy of taking social security early and then repaying this “loan” will always win, financially speaking, over delaying payments to maximize benefits at age 70. And it’s so easy to do to. All you have to do is fill out a form (SSA Form 521). Once you’ve done that your current monthly benefits will stop. The Social Security Administration will send you a letter detailing how much you need to repay in order to reset your monthly benefit amount. Once you repay all the money you received from them over the last few years, you can reapply for social security benefits at the higher payment based upon your current age. This will forever lock you into receiving the larger monthly amount.

Why would you want to do this? Two reasons. The larger monthly amount will maximize the benefits for your survivors, like spouses and children. If you were the breadwinner and your spouse outlives you the larger monthly benefit checks will help them maintain their lifestyle after your death. You won’t have to worry about providing for your family after you’re gone.

The other reason to take advantage of this loophole is for investment purposes. The most conservative investing will still net you thousands of dollars in free money. If you use my previous example of receiving $750 a month starting at age 62 you will have received $72,000 ($750 x 96 months) over the course of eight years . If all you do is stick that money each month into a investment account earning a very conservative 5% you will make $15,505.37 in interest. Holy Moly, over $15,000 and you didn’t have to DO anything to earn it! That’s amazing.

The other great thing about this loophole is there is very little risk. If your plan is to take the reduced benefits and then pay the money back later, but your investments tank or something else happens you don’t have to pay back the loan. You just keep receiving the reduced benefit amount for the rest of your life.

The popularity of this strategy has risen in the last three years. In 2007 just 500 people out of more than 37 million retirees and their dependents took advantage of this loophole. By 2009 that number had nearly doubled. Needless to say this loophole is very costly to the government and there are rumblings that they may close this unintended loophole they’ve created. The Social Security Administration has proposed changes that would allow retirees to only be able to reset their payments higher within 12 months of when they first began receiving benefits. After the first year of receiving social security benefits, retirees would no longer be able to repay the benefits they’ve received to attain the higher benefit amount later.

Considering how hard it is for lawmakers to pass bills that take away money and investment opportunities from retirees I’m not positive this change will come to fruition. Even if these proposed changes do occur it is unlikely the government would close this loophole to retirees currently taking reduced benefits. Americans who opted for early benefits at age 62 would probably have a grace period of sorts in which they could file to change back to receiving maximum benefits based on their current age. So take part in this interest free, penalty free retirement loophole before you lose out on this free money opportunity forever!

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Keeping Money In Your Pocket,

Nancy Patterson