Social Security Aims to Close Valuable Loophole for Early Recipients

Last Updated Sep 1, 2010 10:17 AM EDT

The Social Security Do-Over strategy may be done for good. Kiplinger's Personal Finance reports that the Social Security Administration wants to close the door on an arcane, but perfectly legit, strategy that allows anyone who opted to take lower early benefits to pay back the money -- interest and penalty free -- and then reapply for a new benefit at a later age that locks in a higher benefit.

The Social Security reset option, also referred to as the double-dip strategy, can generate substantially higher payouts. For example, under existing rules, someone who starts drawing a benefit at age 62 this year would be eligible for a benefit that is just 75 percent of the benefit available at his full retirement age (66). If a few years later, he pays back any early benefits and then waits to restart benefits at his FRA he would then qualify for the full 100 percent payout. Moreover, if he opts to wait until age 70, his eventual benefit would be 32 percent higher than his FRA benefit, as Social Security raises your benefit 8 percent annually for every year between your FRA and age 70 that you wait to make your claim.

The double-dip strategy has been getting a lot more attention in a post crash world where retirees who took early Social Security -- and have the money to repay early benefits that have been collected -- are eager to lock in that new much-higher payout. The fact that you can claim a tax-deduction or tax credit on income tax paid on returned benefits was another nice deal sweetner.

According to the Kiplinger's article, if the Office of Management & Budget okays the change, retirees will be allowed one reset opportunity within 12 months of making their original claim. That will effectively raise the stakes for getting your Social Security start date right the first time around. As noted in a previous post, anyone anticipating a long retirement, who is also concerned about having sufficient retirement income for those later years of retirement, would be wise to consider delaying claiming Social Security as long as possible.

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