Can, and how, do you do a Social Security Do-Over? What kind of do-overs can you do? What are your choices?
In December 2010 the Social Security Administration abolished the strategy of applying for benefits at 62 and then, eight years later at age 70, withdrawing the application, repaying the benefits collected, reapplying to start a new benefit with maximum delayed credits, and keeping all the investment earnings on the eight years of invested benefits. This strategy went too far in gaming the system and as a result it was likely to be abolished, leaving those who had started benefits (prior to the law change) at 62 with a permanently reduced benefit before they reached age 70 to withdraw and redo. And that’s exactly what happened to them.
But do-overs were not abolished entirely. There can be legitimate reasons for wanting to withdraw an application for Social Security benefits. The most common reason is that the person didn’t realize that applying for early reduced benefits would result in far lower lifetime benefits compared to waiting until Full Retirement Age (FRA) or later to apply. A husband and wife who learn that they could be leaving as much as $500,000 for example, on the table are often understandably eager to rectify the situation if they have already applied for benefits.
Or, a couple learn that one of them is grandfathered under the Budget Act of 2015 to file a restricted application for his spousal benefit. But they can’t do it if they have previously applied. So, they choose to withdraw one of their applications, repay benefits, and reapply for their spousal benefit.
Another common situation is where a client age 65 or older did not realize that by applying for Social Security they are also required to enroll in Medicare Part A. If they have an HSA and want to keep contributing to it, they may decide to withdraw their application for Social Security (because you can’t contribute to an HSA if you have Part A; though you can continue use the HSA to pay medical expenses).
Or, a person may have gone back to work and no longer needs the Social Security income. If they are FRA or older, they can voluntarily suspend their benefit. If they are under FRA, they can’t suspend, so they may decide to withdraw their application instead. (See suspension article here on what happens if you can’t suspend while under FRA).
Here are the current rules for withdrawing an application for Social Security benefits:
- It must be done within the first 12 months after applying for benefits.
- It can be done only once in a lifetime.
- You must repay all benefits received by you and anyone drawing off your record, including spouses and children (but not divorced spouses unless the divorce occurred less than two years prior). Anyone whose benefit would be nullified by the withdrawal must consent in writing to the withdrawal.
- The repayment must include any money withheld for Medicare premiums. If you are keeping Medicare, you will be billed for those premiums. If you are not keeping Medicare, you can re-enroll at a later date under the usual rules – i.e., if you do not maintain employer group insurance you could be subject to late-enrollment penalties.
- The repayment must include any voluntary tax withholding for closed tax years.
If a person paid taxes on benefits that have since been repaid, they will need to file an amended return. Page 15 of IRS Publication 915 explains the tax calculation of repaid benefits in more detail. Please see your tax adviser on how to do this correctly, since correcting this on top of the original amendment would be messy – do it correctly from the start!
How to withdraw
To withdraw an application for benefits, complete Form SSA-521 and give the reason. Send or deliver the form to a local SSA office. Once it’s processed, they will tell you the amount of benefits that need to be repaid.
There are a few practical issues involved in withdrawing and repaying, not the least of which is the hassle. It usually takes several months for the withdrawal to be processed. Amending the tax return adds to the trouble. If someone stands to greatly improve their benefit by withdrawing and reapplying at a later date, it’s worth it. But if they are within a few months of FRA, at which point they can voluntarily suspend. To go to the trouble of withdrawing when the new benefit amount would be only a few dollars more – and especially when the withdrawal may not even be processed by the time they reach FRA – the better approach would be to simply wait until FRA and then suspend. (But if the strategy calls for filing a restricted application, the client must withdraw; they cannot suspend.)
Make sure you know the difference between withdraw and suspend
Understanding what you are trying to do can save a lot of headaches at the SSA office. By understanding the difference between withdrawing and suspending, you can make your wishes are carried out (and may end up educating the Social Security worker in the process).
Remember, withdrawals are generally done before FRA, must be done within 12 months of applying, and involve repaying benefits received. They require the completion of Form SSA-521. Once the withdrawal is processed, it’s as if the you had never applied for benefits. You are free to file a restricted application for spousal benefits (if eligible) or pursue any other maximization strategy, including waiting until age 70 to reapply.
Suspensions are done at FRA or later and do not involve repayments. There is no form, just a verbal request to SSA. While the benefit is in suspension it will build delayed credits to age 70. If you took a reduction for early claiming (benefits started before you reached FRA), the credits will be applied to the reduced amount. So, if you applied before FRA, withdrawing will result in a higher benefit than suspending. But if you are not within that 12-month window to withdraw, suspension at or after FRA is the next best thing.
Must withdraw to receive a different benefit
This sad question often comes up: You applied for your retirement benefit before FRA. Now you are FRA and want to file a restricted application for your spousal benefit and let your own benefit grow. Can you suspend your benefit and receive a spousal benefit from age 66 to 70 while your own benefit builds delayed credits? The answer is no. It is not possible to receive a different benefit while your own benefit is in suspension. The only way to receive a spousal or survivor benefit while your own benefit builds delayed credits is to NOT have filed for your own benefit. This means that if you DID file for your benefit, you must withdraw your application and make it as if you had never filed. Unfortunately, in most of these cases the 12-month window has passed.
Reach people before they apply
Let this discussion of withdrawals and suspensions motivate you to spread the maximization concepts to people BEFORE they apply for Social Security. Once a person applies for benefits, they are very limited in what they can do … and maximization of benefits can be lost. Withdrawals can be done, but they are a hassle. Suspensions can be done but they also have limitations (e.g., can’t switch to a different benefit). The happiest people are the ones who seek expert advice before entering their local Social Security office, and then follow instructions based on the comprehensive, customized scenario planning they received from that consultation.
Social Security workers can’t help you strategize … they can only guide you on the rules for claiming maximum benefits at that moment, not which rule, or combination of rules, may benefit you by maximizing benefits over the long run. The highest benefit NOW may not be the maximum total benefits over your lifetime … there is a difference between the two!
References and further reading:
- If you change your mind…
- GN 00206.005 Requirements for Withdrawal (WD) of a Benefit Application
- GN 00206.014 Processing a Withdrawal (WD) Request made after Adjudication
Original article for an adviser newsletter by Elaine Floyd, CFP®, Director, Retirement and Life Planning, Horsesmouth, LLC, within which I’ve made edits for the broader public.
Photo by Dominik Martin on Stocksnap.