Re-do of Social Security

[Finance Dave]

Has anyone on the board utilized the little known trick of paying back SS earnings and starting over? I'm wondering about all the tax implications such as state taxes, fed, etc.

For those who want to weigh in, let's keep this simple. Assume that my plan is to not work at all while collecting SS, and have my living funds come solely from my IRA.

Anyone been through this?

Thanks,

Dave

 

[73ss454]

I read somewhere that only about 59 people took advantage of this opition in a one year period. Wondering why so few people used this it I spoke with someone about it and they also brought up the tax issue. Never did the #'s but after paying all the taxes on the income from let's say age 62 to 66 I don't know if it's such a great option. I still have 2 or 3 years to worry about it so I haven't tried to do any #'s on it.

 

[harley]

Here's John Greaney's evaluation of the process. Where can a 70-year-old buy the least expensive life annuity?

I've been a convert of the idea since he started talking about it. I can't start for 10 years, so I'm not counting on it. But if only 59 people/year are doing it, maybe it will continue to be overlooked. I like the idea of taking the money early so it's there if I die. But if I don't I can repay it and get the improved annuity later. I Also like the idea of me holding gov't money, getting the interest, and paying it back interest free. Usually goes the other way.

 

[Finance Dave]

Here's John Greaney's evaluation of the process. Where can a 70-year-old buy the least expensive life annuity?

I've been a convert of the idea since he started talking about it. I can't start for 10 years, so I'm not counting on it. But if only 59 people/year are doing it, maybe it will continue to be overlooked. I like the idea of taking the money early so it's there if I die. But if I don't I can repay it and get the improved annuity later. I Also like the idea of me holding gov't money, getting the interest, and paying it back interest free. Usually goes the other way.

Harley thank you very much. There is a lot of info here...so I'll take some time to look into it. I appreciate the link.

Dave

 

[OAG]

I did it recently (still have not reapplied for benefits; and currently plan to wait until 70 or earlier depending on the numbers in the next two years (I will be 68 next month). Most states and local taxers do not tax SS benefits so State taxes are not usually a problem. You have two choices (actually three but the one to do nothing is not to your financial advantage). The two viable choices are a DEDUCTION on IRS Schedule A, or a CREDIT taken on line 70 of IRS 1040. You should figure it both ways and select the one best for you. You make the entry of your choice on the current years return (the year you make the repayment) one time - NO amended returns necessary (read the current instructions in the tax booklet they send you or download IRS publication 17 from their web-site). BTW, I do not consider it a "trick" as it is outlined in IRS publications and according to the IRS and stuff I have read - about 100,000 of these elections are made YEARLY - still a very small number when compared to the overall number of beneficiaries.

 

[rayvt]

I've been a convert of the idea since he started talking about it. ... But if only 59 people/year are doing it, maybe it will continue to be overlooked.

It's not so much that it's overlooked. It's that there is very little reason to do it---very little benefit to doing it. You don't get something for nothing here----you only get the equivalent of an immediate annuity.

Which, BTW, happens to be exactly what the title of the article is.

You give them a chunk of money and they give you a monthly payment for life. When you die, the payments stop--even if you've only received a few of them. Your heirs don't get anything, even if you die after receiving only one monthly payment.

 

[Achiever51]

My father did this. He originally applied for SS benefits at age 62 as he expected to be fully retired at the time. A bit later, he was offered a once in a lifetime job opportunity and he decided to postpone receiving SS as a result. He had to reimburse the SS for about two years worth of SS benefits, and had to note it on his then-current IRS return. He did not have to file amended returns for the two previous years. There was no impact on state taxes. (He subsequently reapplied for SS at age 65...and will be age 90 in January!)

The hardest part of the whole episode as I recall, was dealing with the clerks at the SS office. No one in the office where he filed the paperwork to repay had ever heard of anyone returning their benefits...and they had to consult with someone in another office to get the procedure right!

 

[OAG]

It's not so much that it's overlooked. It's that there is very little reason to do it---very little benefit to doing it. You don't get something for nothing here----you only get the equivalent of an immediate annuity.

Which, BTW, happens to be exactly what the title of the article is.

You give them a chunk of money and they give you a monthly payment for life. When you die, the payments stop--even if you've only received a few of them. Your heirs don't get anything, even if you die after receiving only one monthly payment.

Much of what you say it true when considered in isolation. However, when you consider a survivor's benefits (66% of the higher earner). In my case the cost of the annuity will be $135K for a benefit that increases $16K per year in 28 months. Show me where I can purchase an annuity that pays out an additional annual $16K, fully COLA'd over the at 62 yo benefit. with 66% survivor benefit for that amount of money. Net cost is considerably less when you consider funds repaid are less any earnings on the funds and that all taxes paid on benefits prior to repayment are recouped. That $135K repayment drops to approximately $85K when interest earned and recouped taxes are considered. So bottom line for $85K you get $16K per year in INCREASED benefits. Live to age 75 you win, higher earner (the male) dies early the survivor gets 66% more she would have under the age 62 benefits. Both die earlier -who cares. I have no obligation to heirs IMHO.

 

[rayvt]

I'm just saying that *IF* you took early SS at age 62 *AND* you are now 66-70 *AND* you saved (rather than spent) all the SS payments *AND* you now want an immediate annuity (with COLA), *THEN* doing a SS re-do is a good idea.

That's a lot of caveats.

In particular, the bit about "saved rather than spent the SS payments" is the biggest one. For that to be the case, then receiving the SS was not necessary. And if it isn't/wasn't neccessary, then what's the attraction in receiving a larger un-neccessary payment?

Financially, the major attraction to the SS re-do is that you get to keep all the earnings on the saved early payments. But this is pretty trivial. In my case, $1691/mo earning 3.0% (compounded daily, ignoring income taxes) grows to $86,346 in 4 years (age 62 to 66). For the re-do, I'd have to give back $81,168, for a profit of $5178 (minus income tax).

If the Present Value of the lower age 62 benefit is the same as that of the higher age 66 benefit, then financially it's a wash, so being able to pocket the accrued earnings is the only significant financial benefit.

-------------------------------------
Investments, IRAs, and 401(k) to live on,
company pension for trips to Europe or Bahamas,
and
Social Security for lap dances.

 

[OAG]

That's a lot of caveats.

We did all of them AND our return on the "savings" was between 5.7 and 6.25% (thanks PENFED) The number I used ($135K) includes the "missed" payments for the 28 months I will wait between repayment and reapplication at age 70. It also considers the earnings AFTER taxes. I also used a interest only 15 year HELOC (4.50%/3.825% after taxes) again thanks PENFED, for the repayment so there is currently about a 1.75% annual gain on the repayment amount.

IMHO NO PAYMENT is unnecessary - donations are appreciated by some/many organizations.

My initial response was to OP and I tried to provide the information OP seemed to want. If someone wants to do this, or not want to do this, is their decision.

Next subject will be to move T-IRA to R-IRA but that I am still looking at and may not do it even if tax rules for 2010 seems to be allow it.