I recently read an article and have seen several others regarding the ability to take Social Security early and then later decided to pay back the benefits in order to receive the higher benefit you would have received had you waited. You can review the concept at http://articles.moneycentral.msn.com/RetirementandWills/RetireInStyle/AHiddenSocialSecurityBenefit.aspx.
Several clients have asked whether or not this opportunity could make some sense. Specifically, we have a client with relatively similar SSA benefits and who are both the same age. They do not need their SSA benefits to live on and we suggested they wait until full retirement age in order to receive the higher benefit because the calculations showed that of they lived about 9-10 years past their starting date, they would "win" by waiting. Now they wonder if one should take benefits early, let the other hold off until age 70 and then repay the lower benefits to have two higher benefits for the rest of their lives.
We see some hefty pitfalls to this strategy and wondered if anybody had any insight or has addressed this issue with their client.
1. Receiving benefits now would increase their tax bracket and thus lower the opportunity to possibly convert Roth IRA monies or increase the amount at which their current income is being taxed. Additionally, with the pay-back option, they would be paying taxes on approximately 85% of the SSA benefits, only to pay back the full benefits for a larger benefit that would be taxed again (though there may be some credit).
2. The funds would need to be available to pay back the benefits received, so unless they were saved, they would need to come up with the cash to pay back the benefits.
3. If they pay back the benefits and die soon thereafter, they would lose all of the funds they paid back and may never recoup their money.
Overall, the strategy seems risky and because of our client's unique situation where they both have approximately the same Social Security benefit, there is not much of an advantage in taking early benefits or paying them back for a larger benefit later. As the article suggests as does other research on the topic, these strategies work much better when one spouse has a significantly lower benefit compared to their spouse and will jump to their spouse’s benefit once they retire or pass away.
Any thoughts?