The 5 Social Security Loopholes the Government Doesn’t Want Retirees to Know About
Loophole sounds like a bad word. It immediately makes you think of illegal activity in which something (usually money) is being stolen out from under someone.
But not all loopholes are bad.
In fact, I want to tell you about 5 such loopholes that allow retirees to increase their social security checks and pocket an extra $75,000. While these 5 loopholes are 100% legal and recognized by the government they still don’t want me to tell you about them. They stopped advertising these 5 loopholes decades ago because retirees were making too much money off them in the form of much higher social security checks. While the government does not publicize these loopholes, they do honor anyone who takes advantage of them.
I first found out about these loopholes through my own mother and father who have recently retired. My parents are taking advantage of one such loophole as we speak. Once I found out about this one loophole I started doing some digging to see if there were any more and that’s when I stumbled upon the other four.
The one my parents take advantage of you can also take advantage of if both you and your spouse worked over the years and qualify for social security. My father was the breadwinner between him and my mother. My mother worked but never made as much money as my father did at any point during their careers. The government allows spouses to collect benefits starting at age 62 as long as the other spouse has filed for social security benefits. But as you know the earlier you file for benefits the more your monthly checks are reduced. Spouses, like my mom, that wait to file for spousal benefits until they reach full retirement age receive about half of what my Dad’s (the higher earning spouse) benefit is.
So far this probably doesn’t sound very ground breaking or financially savvy to you. But wait, it’s what my Mom and Dad did next that netted them a whole bunch of extra money each month from the government. See because my Mom worked and paid into social security during the times she worked she is eligible to receive her own social security benefits, not just spousal support. When my Mom applied for and received spousal benefits she allowed her own benefits to grow until age 70, at which point she would be receiving the highest possible amount of benefits. At this point, my Mom can now switch over to her own Social Security benefits that are higher than the spousal benefits she is receiving. This allows my parents to delay the benefit so it can accrue and grow until age 70 and collect a spousal support as bonus money while they wait.
Here’s an example to help explain. Let’s say my Dad files for Social security and gets $1200 a month. My Mom finds out that if she applies for her own benefits at age 62 she’ll receive $400 a month. If she waits till she’s full retirement age she’ll get $500. Both of which are still less than half of my Dad’s benefit amounts, which she is entitled to if she files for spousal benefits. So she files for the spousal benefits and gets $600 a month for the next few years until she reaches age 70. At that point her own benefits have been left to grow to the maximum benefit amount so she switches to her own benefit, which would be higher since your original $500 a month benefit increased by eight percent a year to $680 a month.
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 a 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,