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Family Maximum Benefit (Disability)

Feb 13th, 2023
by jblankenship.
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In a previous article we talked about the Social Security Family Maximum Benefit for a retired worker – and we mentioned that there was a separate calculation for the Social Security Family Maximum Benefit for a disabled worker.

This calculation is much simpler than the retired worker calculation for Family Maximum Benefits. Nonetheless, hang on to your hat, keep your arms and legs inside the car at all times, cuz this may still get a little outtahand:

The family maximum for the spouse and children of a disabled worker is 85% of the worker’s Average Indexed Monthly Earnings (AIME), but the family maximum cannot be less than the worker’s Primary Insurance Amount (PIA) nor more than 150% of the PIA.

If you’ll recall, the FMB for a retirement benefit is solely based on the PIA. This allows for an adjustment upward in some cases if the AIME is smaller, at the lower end of the spectrum. The crossover point from the PIA floor occurs (for 2023) on a AIME between $1,200 and $1,300, and the crossover from 85% of AIME to 150% of PIA occurs between $2,600 and $2,700.

Example

Let’s use an example AIME amount:  $4,400.00. For this worker reaching age 62 in 2023, the PIA would be $2,054.70.

So, the maximum family benefit for the disabled worker’s family would be equal to the lesser of 85% of the AIME or 150% of the PIA, but in no case not less than the PIA.

85% of the AIME:  85% times $4,400.00 = $3,740.00
150% of the PIA:  150% times $2,054.70 = $3,082.05

The maximum family benefit is the lesser of those two factors, or $3,082.05 – rounded up to the nearest dime as $3,082.10.

Posted on Feb 13th, 2023
by author: jblankenship.

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Your Appeal Rights at the IRS

Jan 16th, 2023
by jblankenship.
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If you have received a result from an IRS examination that requires an adjustment to your tax liability and you don’t agree with the result, you have certain rights to appeal – your opportunity to state your case and perhaps get an overturn of the result of your examination. (It’s always possible!)

Facts About Your Appeal Rights

The IRS has put together a list of seven facts that they want you to be aware of with regard to your appeal rights (for more information see Tax Tip 2022.82):

  1. When the IRS makes an adjustment to your tax return, you will receive a report or letter explaining the proposed adjustments. This letter will also explain how to request a conference with an Appeals Office should you not agree with the IRS finding on your tax return.
  2. In addition to tax return examinations, many other tax obligations can be appealed. You may also appeal penalties, interest, trust fund recovery penalties, offers in compromise, liens, and levies.
  3. You are urged to be prepared with appropriate records and documentation to support your position if you request a conference with an IRS Appeals employee.
  4. Appeals conferences are informal meetings. You may represent yourself or have someone else represent you (such as an Enrolled Agent, an attorney, or a CPA).
  5. The IRS Appeals Office is separate from – and independent of – the IRS office taking the action you may disagree with. The Appeals Office is the only level of administrative appeal within the agency.
  6. If you do not reach agreement with IRS Appeals or if you do not wish to appeal within the IRS, you may appeal certain actions through the courts.
  7. For further information on the appeals process, refer to IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Disagree.

Additional Publications

In addition to Publication 5, there are several other IRS Publications that may help you in your appeal process. For example, Publication 556, Examination of Returns, Appeal Rights and Claims for Refund. You can also refer to Publication 1660 (PDF), Collection Appeal Rights, which discusses how you can appeal collection actions and Publication 3605, Fast Track Mediation–A Process for Prompt Resolution of Tax Issues. There is also Publication 1, Your Rights as a Taxpayer.

Posted on Jan 16th, 2023
by author: jblankenship.

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Posted in: income tax, irs, tax.
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When Your Birthday Isn’t Your Birthday

Jan 9th, 2023
by jblankenship.
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(According to the Social Security Administration)

There are a couple of circumstances where the Social Security Administration changes your birthdate for you. Chances are if this applies to you, you already know this, but I thought I’d explain it anyhow just so you’ll know what it’s all about.

First of the Month

If your date of birth is on the first day of the month, then for Social Security purposes, your Birth Month is actually the month prior to your actual date of birth. So if you were born on July 1, according to the Social Security Administration, your Birth Month, and therefore the month that your benefit is based upon (for example, Full Retirement Age), is June. In this example, your Birth Year remains the same, but that’s not always the case…

First of January

In the case of a date of birth being January 1, your Birth Month is December, and your Birth Year is the year prior to your actual birth.

Twenty-ninth of February

If you are one of the lucky ones that happen to have been born on Leap Day, February 29 – you’re in luck! The Social Security Administration doesn’t really care what day of the month you were born, only the month and year. So even though your actual date of birth anniversary doesn’t come every year, the month does, and the Social Security Administration counts February as your Birth Month in your case.

Posted on Jan 9th, 2023
by author: jblankenship.

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Social Security: Average Indexed Monthly Earnings (AIME) Explanation

Dec 19th, 2022
by jblankenship.
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an omelet in Denver

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One of the key components that the Social Security Administration uses to calculate your Social Security retirement benefit is called the Average Indexed Monthly Earnings, or AIME (don’t you just love the acronym-loving Social Security Administration?  Errr… SSA.). The AIME is calculated by taking the highest-earning (by index) 35 years of your working life while covered by Social Security, and then computing an average monthly amount based upon those indexed amounts.

Gobbledy-gook, right? Okay, here’s another way to explain it: as you work in a Social Security insured job, your earnings are recorded each year. Each year the SSA applies a multiplier to the year’s wages, based upon an index called the Average Wage Index. Each person’s index is based on the year they reach age 62. The indexes for each year of your earnings is adjusted, reflecting the change from when your earnings were recorded by comparison to the year you reach age 62.

Once you are eligible for retirement (age 62, your Earliest Eligibility Age, or EEA), these years of earnings are put into a table and the indexes applied. Listed below is an example of an earnings table with indexes applied (keep in mind this is an example for a specific age – your own indexes will likely be different):

Average Indexed Monthly Earnings

Age Earnings Index Indexed Earnings
22 $ 5,000.00 7.4186559 $37,093.28
23 $ 5,589.41 7.0133446 $39,200.47
24 $ 5,771.91 6.6817598 $38,566.51
25 $ 5,951.90 6.362084 $37,866.51
26 $ 6,259.69 5.794243 $36,270.16
27 $ 6,598.18 5.453047 $35,980.19
28 $ 6,724.29 5.147081 $34,610.48
29 $ 7,263.44 4.789173 $34,785.89
30 $ 7,652.52 4.480037 $34,283.57
31 $ 8,151.79 4.226722 $34,455.35
32 $ 8,771.10 3.915769 $34,345.61
33 $ 9,095.79 3.600777 $32,751.90
34 $ 9,809.52 3.303241 $32,403.21
35 $10,300.66 3.001138 $30,913.71
36 $11,796.26 2.84454 $33,554.93
37 $12,072.71 2.712404 $32,746.07
38 $13,417.50 2.561809 $34,373.08
39 $15,014.39 2.457123 $36,892.20
40 $16,488.37 2.386295 $39,346.11
41 $17,578.53 2.243234 $39,432.76
42 $19,816.33 2.137938 $42,366.08
43 $20,064.41 2.056512 $41,262.70
44 $22,795.36 1.965713 $44,809.12
45 $25,440.98 1.895091 $48,212.98
46 $26,801.49 1.802233 $48,302.53
47 $27,536.23 1.786866 $49,203.55
48 $30,992.15 1.740161 $53,931.33
49 $34,893.01 1.673097 $58,379.40
50 $36,396.83 1.595089 $58,056.18
51 $36,936.43 1.507145 $55,668.58
52 $41,035.24 1.432187 $58,770.12
53 $42,533.74 1.356586 $57,700.69
54 $45,383.43 1.285498 $58,340.33
55 $50,034.62 1.255546 $62,820.74
56 $51,454.51 1.243079 $63,962.02
57 $55,140.29 1.213416 $66,908.14
58 $61,014.02 1.159513 $70,746.57
59 $64,329.16 1.118584 $71,957.57
60 $67,170.90 1.06943 $71,834.56
61 $73,383.51 1.023004 $75,071.63
62 $82,983.83 1 $82,983.83
Average of top 35 years $49,898.35
Monthly Average $4,158.20

This table shows that your wages earned in each year you were working have been indexed to compare with the Average Wage Index for your age 62 year. Then the top 35 indexed earnings years are totaled and divided by 420 to come up with the Average Indexed Monthly Earnings – your very own AIME. The reason they’re divided by 420 is that this is the number of months in 35 years. The AIME is generally always produced by dividing the top 35 years by 420, even if there are fewer than 35 years in the table (such as if you had years without earnings).

With this table in mind, you can see how the AIME can increase if you continue working past age 62 – of course those earnings will be added to the table (but not indexed after age 62), and assuming that this knocks out one of your lower earning years, the average would increase.

And, as you might guess, this AIME isn’t the amount of retirement benefit that you can expect: more factors need to be applied to come up with your PIA, and then your actual retirement age is applied to that, to come up with your benefit amount.

Posted on Dec 19th, 2022
by author: jblankenship.

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Posted in: primary insurance amount, Social Security.
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IRA Investment Planning for Taxation

Dec 12th, 2022
by jblankenship.
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tax tail investment dog

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The question often comes up – what types of investments are best for my IRA?

Of course, any investment that you make in a tax-deferred fashion is a good one, at least in theory. But there are some investments that make the most sense for your IRA versus other vehicles… and some investments that make more sense in other kinds of investment accounts, where possible.

Listed below are a couple of considerations to take into account when considering taxation of your IRA and non-IRA investments.

Bonds and other interest-bearing vehicles

Given the nature of the IRA – deferring taxation on current income and growth, investments that would otherwise be taxed at ordinary income tax rates would be best for your IRA.

This includes the likes of interest-bearing investments, such as CDs or bonds. Since, presumably, your tax rate when you begin taking distributions will be either the same or less than your rate before retirement, the deferral will provide for the interest to be taxed at either the same rate or lower, just later in your life.

Growth-oriented and dividend-paying investments

Growth-oriented stocks and investments that pay current dividends make more sense to be held in taxable accounts than in deferred accounts. This is due to the fact that dividends and capital gains are (at least for now) taxed at much lower rates than ordinary income – which is the rate your distributions from the IRA will be taxed at.

Under today’s rules, most folks won’t pay more than 15% tax on dividends and capital gains, and many will pay 0% tax. But if these dividends and capital gains are from investments within an IRA, everything will be taxed at ordinary income tax rates, which can be as high as 37%.

The same would be true of other growth- and dividend-oriented investments such as real estate and commodities, for example.

Bottom Line

So in other words, if you have the ability, you should split your interest earning investments into your IRA, and growth- and dividend-oriented investments into taxable accounts. This way, you won’t be subjecting lower-taxed items to a higher tax rate – if possible.

This doesn’t mean that you should ONLY invest in items that would be taxed at ordinary rates within your IRA. This is known as letting the tax-tail wag the investment dog. Tax planning should always be considered as you plan your investments, but appropriate diversification should always be your first consideration. It may be easiest for you to diversify within each type of account, but for tax efficiency you might want to diversify among all of your accounts as a single item.

In addition, the deductibility of IRA (and 401(k)) contributions provides a benefit that should be weighed against the taxation concepts we’ve talked about above as well. Again, the tax-tail shouldn’t wag the investment dog…

Posted on Dec 12th, 2022
by author: jblankenship.

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Posted in: investing, IRA, retirement plan, tax.
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A Cash Flow Dilemma – Should I take distributions from my IRA or from my taxable account?

Dec 5th, 2022
by jblankenship.
6 comments
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I know, long title… but I wanted to fully describe the content of this article, which is to answer the following dilemma: I have a sizable IRA and a sizable taxable account that holds appreciated stocks. I am in need of additional funds (above any RMD required from the IRA) – so which account should I draw the additional funds from?

Taxable account!

There is one school of thought that says you should take the additional funds from the taxable account, because at today’s capital gains rates you will save a bundle in taxes.

The capital gains on your appreciated stock will at most be taxed at 20% under present law. But quite likely your rate will be less at 15%, and could possibly even be zero. When you compare this tax rate to the ordinary income tax rates, which top out at 37% for 2023 (same as last year), this is a bargain. This also assumes that you’ve held the stock for at least 12 months, otherwise your gains would be taxed at your marginal ordinary income tax rate.

It’s a no-brainer, you should always take this extra money from the taxable account, right? No, not always…

IRA account!

There is another school of thought that says, since appreciated stock receives a step-up in basis at your death, you should leave those funds alone if you can and plan to leave them to your heirs. This way the appreciated portion is never taxed.

So when you consider the concept of paying ordinary tax on your IRA distribution and zero tax on the taxable account (assuming you never need to use those funds) versus paying capital gains on the taxable account and potentially leaving your heirs with a fully-taxable IRA (because IRA funds never receive a step-up in basis), this method seems to make a lot of sense.

Conclusion

In the circumstance where you know you’re going to need most or all of the funds from both accounts, it probably doesn’t make much difference in the long run. But you would likely come out better, at least in the short run, using the taxable funds at today’s low capital gains rates first. This will hold true until changes are made the the capital gains tax rates that might make this method less desirable.

But if your holdings are large enough in either account to cover your needs for the longer term, with some planning of your distributions you might come out better with the second method. Or rather, your heirs will come out better in the long run, since the step-up rule is unlikely to change anytime soon. (Now watch Congress make a change to the step-up rule!)

You could also vary your strategy and use IRA funds in one year, and capital gains accounts in another year, “stacking” the ordinary income versus the capital gains income. You might even use the difference (in the capital gains year) to convert some of your IRA money to Roth.

Posted on Dec 5th, 2022
by author: jblankenship.

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Posted in: IRA, retirement plan, tax.
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Know Thyself

Oct 31st, 2022
by jblankenship.
2 comments
h dumpty

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This ancient two-word phrase, attributed to several Greek luminaries ranging from Socrates to Pythagoras, implores the reader toward introspection. This introspection can be especially helpful when considering how we feel about our financial future – particularly when we are at extremes of emotion.

The recent stock market activity has given us plenty of opportunities to experience extremes of emotion… but then again, you can pretty much choose any time period and make a similar statement. There are quite a few studies that have recently brought to the forefront several things that we need to understand about ourselves and how emotion could impact our decision-making process.

Loss Aversion – as investors in general, we feel the impact of a loss approximately twice as much as we experience the good feelings from a gain. It has further been estimated that as we approach retirement, this ratio increases to a factor of five times more pain for a loss as opposed to the joy we experience for a gain.

This seems to be true no matter whether the loss is realized or simply on paper. The problem is that, in stock market investing, short term losses and gains are simply normal market activity, and we need to temper our emotions to keep things in perspective.

We Want Control… or Do We? – it would seem to follow the train of thought that, if we are feeling pain in our investing activities we’d appreciate some guarantees and protection of some sort in our choices of products. However, guarantees come with a cost – that of giving up control. And as investors we prefer control (or the perception of control) over guarantees, studies have shown.

On the other hand, other studies tell us that a guaranteed income from an investment is preferred over an assured return on investment over time. These studies show that, given a choice between an annuity with a monthly income and an investment portfolio structured to provide the same sort of returns over time, if we’re near retirement we choose the annuity seven times out of ten.

This seems to imply that we value the concept of income, that of receiving a check every month, over the excess costs and lack of control that an annuity represents. At the same time, we prefer to feel like we’re in control of our investing activities, which is counter to the argument in favor of an annuity.

Lack of Understanding of the Numbers – when presented with the outcome of financial calculators, many of us consider whatever calculations were done in the background to be tantamount to magic. For example, the very concept of inflation and its impact on our future finances is a mystery to us – we work best when calculations are discounted to present values.

Even though it’s been decided that it was politically incorrect, one popular baby-boomer who is now age 63 once admitted that math is tough (Barbie, of the doll fame, who actually admitted that “Math class is tough”). There’s no shame in admitting that factor – for a lot of us, math can be very tough. And as we get older (some say by around age 53) our understanding of mathematical calculations begins to decline dramatically, making math even tougher.

This can lead to distrust of the very calculations that could help you make good decisions in your financial life.

So What Does All Of This Mean?

Mostly this just means that we’re carrying with us a lot of preconceived notions and emotional preferences that we must take into account as we make financial decisions. “Know Thyself” means that we should understand how these various notions can paint our perceptions of situations, and if we understand these things, we can recognize when our own limitations are working against us and take actions to consider things in a new, less biased, light.

For example, it’s natural to feel the pain of losses. But as explained in the article The Lost Decade and What It Means, (yes, it’s an oldy, but a goody) the activity of investing, especially in the stock markets, is a long-term activity and short-term losses, even over a few years, are temporary in the scheme of things. Keep this in mind before making any rash investment decisions – you’re likely to regret emotion-driven decisions.

Posted on Oct 31st, 2022
by author: jblankenship.

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When a 60-day Rollover is Not a 60-day Rollover

Oct 10th, 2022
by jblankenship.
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A Private Letter Ruling (PLR) from 2010 presents an interesting outcome from an indirect rollover – a rollover that was not done in a trustee-to-trustee transfer.

This particular PLR, 201005057, deals with a situation where the taxpayer received a check from her former employer plan, however the check was made out to her new employer, for her benefit.

When the taxpayer failed to deliver the check to the new plan within 60 days, the rollover became questionable – since indirect (non-trustee-to-trustee transfers) are generally limited to be completed within 60 days.  (She did deposit it, just a little later than 60 days.)

When the taxpayer received a 1099R from the former employer plan, it was coded with distribution code “G”, which indicates a direct rollover.  Therefore the intent for a direct rollover was clear.

The IRS ruled in favor of the taxpayer, since the check was made out to the new plan, and therefore not in the control of the taxpayer.  In other words, the taxpayer could not have used the funds for any other purpose than to deposit into the new plan.   The check made out to the new custodian effectively acted as a direct rollover into the new plan, in the eyes of the IRS, and as such it was not subject to the 60-day limit.

It appears from this PLR that a taxpayer receiving such a distribution can delay depositing the check after the 60-day limit, since such a distribution is considered to be a direct rollover.  I don’t know of any practical reason you would want to do this, but if circumstances brought about such a situation, it’s good news.

Keep in mind that PLRs cannot be used to substantiate a position or cite as a precedent (pursuant to 26 USC § 6110(k)(3)), but can be used as guidance for determining if a matter is worthy of pursuing via your own private letter ruling.

Posted on Oct 10th, 2022
by author: jblankenship.

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Posted in: employer plan, IRA, irs, plr, private letter ruling, qualified retirement plan, retirement plan.
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Survivor Benefit flexibility

Oct 3rd, 2022
by jblankenship.
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Photo credit: jb

Many of the Social Security rule changes that have been put into place in the past several years have removed flexibility in Social Security claiming strategies. However, Survivor Benefits, coordinated with your own retirement benefit (if you’re a surviving spouse or surviving divorced spouse), remain as one of the last bastions of flexibility for claiming strategies.

Survivor benefit first, retirement benefit later

As we’ve discussed in other articles, claiming Survivor benefits early and then claiming your own Retirement benefit later provides one flexible claiming strategy that you might be able to employ.

For example, Dina is divorced (after more than 10 years), unmarried, age 60, and her ex-husband passed away recently. Dina could file for and receive a Survivor benefit based on her late ex-husband’s record right away, and collect that benefit for a while. Then, at any point she could switch over to her own retirement benefit if it is larger than the Survivor benefit, and continue collecting that benefit.

This strategy works well if the surviving spouse has earned his or her own retirement benefit during his or her career, and at some point the retirement benefit will grow to a point when it’s greater than the Survivor benefit. This crossover might occur within a few months after she starts taking the Survivor benefit, or at any point along the spectrum between start of Survivor benefits and his or her age 70.

In Dina’s case, her own retirement benefit will be greater than the Survivor benefit at once when she reaches age 62. (Keep in mind, if she’s started the Survivor benefit at age 60 this benefit will be reduced; likewise if she starts her own benefit at age 62 the retirement benefit will also be reduced.) Dina could start receiving the larger retirement benefit at age 62, or at any point through the years up to age 70 if she wants.

When Dina starts receiving the retirement benefit, since the retirement benefit is larger than the Survivor benefit, the Survivor benefit will end. Technically (and this is important to the rules) the Survivor benefit will terminate if Dina’s PIA is larger than the PIA upon which her Survivor benefit is calculated. It’s a technicality, because generally if Dina’s reduced retirement benefit is greater than the reduced Survivor benefit, more than likely the PIA of each benefit will correspond in size.

At any rate, that’s how the “Survivor benefit first, retirement benefit later” strategy works. The key to this strategy is that starting the Survivor benefit early has no impact on Dina’s later ability to file for and receive a retirement benefit. The delayed receipt of the retirement benefit is added to Dina’s record as if she had not filed for a previous benefit (in other words, no deeming is applied).

Retirement benefit first, Survivor benefit later

This strategy can work in the reverse as well. Dina could wait until her age 62 and start receiving her own retirement benefit, reduced due to the early filing. Then she could wait until as late as her Full Retirement Age (for survivor benefits, slightly different from the regular FRA) and file for the Survivor benefit. This filing would be unaffected by the early filing for her retirement benefit.

Survivor benefit first, then retirement benefit, then Survivor benefit again

You might think that this is where the flexibility story ends, but you’d be wrong. There is one other strategy that the rules allow. In Dina’s case, she could start taking the Survivor benefit at age 60 (reduced to the minimum), and then at or after age 62 (but before her Survivor benefit FRA) file for her own retirement benefit. If, upon filing for her retirement benefit the retirement PIA is greater than the Survivor benefit PIA, the Survivor benefit will terminate at this point, as discussed earlier.

Now is when this final flexibility option comes into play. If it turns out that Dina’s Survivor benefit might at some point become larger than her Retirement benefit, she has the option to re-entitle the Survivor benefit. (Reentitlement is SSA’s term for filing for and receiving a benefit that had been received previously, but had terminated.)

The numbers have to work out in her favor, but follow this: starting her Survivor benefit at age 60 resulted in a reduction of the maximum amount, 28.5%, to Dina’s Survivor benefit. This is based on her Full Retirement Age of 67, which means a reduction period of 84 months (7 years).

But if she starts her own retirement benefit at age 62, thus terminating the Survivor benefit, she has the option to re-entitle the Survivor benefit, with the calculation eliminating those months during which she was receiving the retirement benefit (and the Survivor benefit was terminated). So if she waits until her FRA for Survivor benefits, her newly re-entitled Survivor benefit would be calculated based on a reduction of only 24 months – those months that she had collected earlier. Full Retirement Age is the latest that it makes sense to apply this re-entitlement, as beyond FRA the Survivor benefit will not increase except for annual COLAs. (For the rules geeks in the audience, see POMS RS 00615.301A.2, second bullet point for the explanation and another example.)

So instead of an 84 month reduction of 28.5%, Dina’s new Survivor benefit would only be reduced by 24 months, which calculates to a reduction of 8.14%. If, for example, her original reduced Survivor benefit was $1,000, this adjustment upon re-entitlement would bring the benefit up to $1,285, plus the COLAs from the intervening years.

Not a lot of surviving spouses and ex-spouses will have this flexibility available to them, but for the ones that do have it, this strategy can help out quite a lot, I imagine.

The strategy outlined above only applies in a situation where the Survivor benefit that is re-entitled is the same Survivor benefit that had been previously received. Otherwise, if a new Survivor benefit (based on the record a different spouse, also deceased) is applied for, it will be treated as the first time you’ve filed for a Survivor benefit. The prior reduced Survivor benefit has no bearing on the amount of this new Survivor benefit.

This one doesn’t work in vice versa

It’s critical to note that the above strategy (Survivor benefit first, then retirement benefit, then Survivor benefit again) does not work in the reverse. Dina could not, for example, begin her retirement benefit at age 62, then switch to Survivor benefits at (for example) 64, and then switch back to retirement benefits later on. This is because of the technical matter that I mentioned above, where the Survivor benefit becomes terminated upon receipt of a higher retirement benefit. The retirement benefit does not similarly terminate when a higher Survivor benefit starts up. In that case, the Survivor benefit (if higher than the retirement benefit) becomes an “excess” benefit, and the difference between the retirement benefit to the Survivor benefit is simply added to the retirement benefit.

Posted on Oct 3rd, 2022
by author: jblankenship.

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Posted in: Social Security, social security retirement, social security survivor benefits.

Disability Benefits at Retirement Age

Sep 26th, 2022
by jblankenship.
1 comment
my-that-cake-is-short

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What options do you have available to you when you’ve been receiving Social Security disability payments – and you’re nearing Full Retirement Age (FRA)? A reader recently asked this question as she and her husband are facing decisions with just such a situation…

Disability Benefits at Retirement Age

As you reach FRA, your Social Security Disability Benefit will automatically convert over to a Retirement Benefit, at the same amount.

What does this mean? Essentially, once you reach FRA, since you’re now on a Retirement Benefit, you have all of the features available to you as if you had not received any benefit prior to this point and you’re now retired. So your spouse can collect Spousal Benefits based on your Primary Insurance Amount; Survivor Benefits are also available; and you can choose to Suspend your benefits at FRA (no need to File before suspending, you have effectively filed when your Disability Benefit converted to Retirement Benefits).

Just keep in mind that by suspending your benefits, you’re suspending all benefits associated with your record. Any spousal or dependent’s benefit will likewise be suspended and not paid.

By suspending, you can earn Delayed Retirement Credits (DRCs) of 8% per year up to age 70, which will permanently increase your own benefit and your spouse’s potential future Survivor Benefit.

Obviously, there is no requirement for you to change anything at all once you reach FRA – you can continue receiving the Retirement Benefit the same as you have been receiving the Disability Benefit up to this point.

It’s an unusual situation, but something to keep in mind if you happen to be facing this circumstance.

Posted on Sep 26th, 2022
by author: jblankenship.

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Posted in: delayed benefit, disability benefits, reader questions, retirement benefits, Social Security.
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FRA for Retirement Benefits vs FRA for Survivor Benefits

Sep 15th, 2022
by jblankenship.
2 comments

As mentioned in many articles on this site, there is a difference between the Full Retirement Age (FRA) for Social Security Retirement Benefits and the FRA for Social Security Survivor Benefits.

This is due to the way that the language of the reductions rules is written. The rules are written based upon the earliest age that you are eligible for each type of benefit. Since Survivor benefits are available as early as age 60 under common circumstances, and Retirement Benefits are available at age 62 at the earliest, there is a two-year offset between the two FRA tables, as illustrated below:

Full Retirement Age – Retirement Benefits
Born in: Full Retirement Age (FRA) is:
1943-1954 66
1955 66y, 2m
1956 66y, 4m
1957 66y, 6m
1958 66y, 8m
1959 66y, 10m
1960 or later 67

Note that each “Born in” year is two years later than the complementary year in the Retirement benefit table.

Full Retirement Age – Survivor Benefits
Born in: Full Retirement Age (FRA) is:
1945-1956 66
1957 66y, 2m
1958 66y, 4m
1959 66y, 6m
1960 66y, 8m
1961 66y, 10m
1962 or later 67
Posted on Sep 15th, 2022
by author: jblankenship.

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Posted in: FRA, Full Retirement Age, social security retirement, social security survivor benefits.

How does WEP work for a lump-sum pension payout?

Aug 8th, 2022
by jblankenship.
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lump-sum clouds

Photo credit: jb

In other articles we’ve covered how a typical annuitized pension triggers the Windfall Elimination Provision (WEP), but how about a lump-sum pension payout? How does this work? How is the amount of the “pension” determined for the WEP calculation?

This type of lump-sum payment can be either from a defined benefit plan such as the typical annuity pension, or it can be from a defined contribution plan (like a 401(k), 403(b), or 457 plan). For simplicity, since the rules are the same either way, we’ll refer to both defined contribution and defined benefit plans in this article as “pension plans”.

We know from other study of WEP that the maximum WEP reduction can be limited by the monthly amount of your pension benefits. So we need to determine what a lump-sum payment at a particular age is equivalent to in terms of a monthly payment. Social Security has a way to perform this calculation.

In POMS RS 00605.364 Determining Pension Applicability, Eligibility Date, and Monthly Amount(5) is an actuarial table that is used to convert a lump-sum pension payment into a monthly equivalent. To use the table, find the age that you are when you are taking the lump-sum payment in the left column. Then, assuming your lump-sum is received in the current year, go to the next column to the right for the divisor factor. (This is an important number for another reason that we’ll cover later.) If you received the lump-sum at some point in the past, review the various column headings to see if one of those is more appropriate for your circumstances, and use the divisor factor from the applicable column.

Divide the lump-sum payment by the divisor factor for your age when the lump sum is received. This is the monthly equivalent of your lump-sum payment. This can be important to help determine the maximum WEP reduction, since WEP reduction cannot be more than 50% of the monthly pension payment, if that amount is less than the bend point maximum.

To work through an example, let’s say we have a lump-sum pension payment in the amount of $250,000, and we’re receiving this lump-sum payment in 2022 at the age of 65. Going to the actuarial table, we find that our divisor factor is 180.3. Dividing $250,000 by 180.3 gives us $1,386.58 as the monthly equivalent benefit amount. 

When we look at the WEP calculation for this individual (age 65 in 2022), we see that the maximum WEP reduction based on bend points is $463, so the monthly equivalent doesn’t factor into the calculation for this individual. 

On the other hand, let’s say the lump-sum payment is $50,000 (other factors remaining the same). This gives us a monthly equivalent of $277.32. Since 50% of this amount is far less than the maximum WEP based on bend points, this means that the maximum WEP reduction in this scenario is $138.66.

Earlier I mentioned that the divisor factor is important for another reason beyond calculating the monthly equivalent pension amount from your lump-sum payment. Here’s the reason: the divisor factor is a determination of your lifespan, in months, from the current year. From our example, the divisor factor was 180.3 – this means the actuarial lifespan of the individual at age 65 is 15 years (180 months and some change). 

If our example individual lived more than 15 (and some change) years, then WEP will no longer apply to this individual. Effectively he has lived past the monthly payout equivalent, and so the WEP reduction will be removed from his PIA calculation at that point.

Posted on Aug 8th, 2022
by author: jblankenship.

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Posted in: Social Security, wep, windfall elimination provision.

Your Social Security Benefits Statement

Jul 18th, 2022
by jblankenship.
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ss statementBack in the olden days, we all received an annual statement from the Social Security Administration detailing your benefits projected to your potential retirement age(s). Nowadays you can go online (www.SocialSecurity.gov) and request a current statement at any time. If you haven’t gone online for your statement and you’re at least age 60, you should receive a mailed copy of the statement annually until you start receiving benefits.

While the statement is designed to be pretty well self-explanatory, I thought it might be beneficial to review the statement so that you know what the statement is telling you. The statement has been redesigned recently, so it will look considerably different from the old school statement.

First Page

The first page of the statement contains a host of really important information for your benefit. Under “Retirement Benefits” you’ll find your Full Retirement Age (based on your date of birth), and to the right of this paragraph you’ll find a chart with the estimated monthly benefit that you are eligible for, with the assumption that you continue to earn at the same rate as your most recently-reported earnings.

Below “Retirement Benefits” you’ll find information about your “Disability Benefits”, including the amount that you could receive if you became disabled right now.

Next on the page is the estimate of “Survivor Benefits” that could be available to your spouse and/or dependents upon your demise.

To the right (below the Retirement Benefit chart) is the information about your eligibility for Medicare benefits. This includes your age for eligibility and your current status – whether you’ve earned enough credits for Medicare eligibility.

Second Page

The Second Page of the statement lists out the details of your Earnings Record in the left column. This section is important to review carefully… you should review the earnings listed for each year against your tax records or W2 statements, to make sure that the information the SSA has is correct. In addition to reviewing for correctness, you should look over your record and note the “zero” earnings years, as well as years that you earned considerably less than what you earned (or are earning) in later years.

There are details on how to report any inaccuracies that you might find on your statement. It’s much easier to resolve things earlier in the process rather than later – when you’re possibly under the gun about applying for your benefits.

It should be noted that in the interest of saving space, your earliest earnings records are combined by decade. You can review each individual year’s earnings record online in your my Social Security account.

As we’ve discussed in the past, your benefits are based upon your 35 highest earning years. If you have had some “zero” years in the past or some very low earnings years, you can expect for your estimated benefit to reflect any increases that the current year’s income represents over your earlier low earnings or zero years. This only becomes significant once you have a full 35 year record in the system.

Another key here is that your projected benefits listed on the first page are based upon your earnings remaining the same until your projected retirement age(s). If you choose, for example, to retire at age 55 and have no earnings subject to Social Security withholding, your projected benefit could be reduced since those years projected at your current earning level will actually be “zero” years. Alternatively, your earnings might not be zero but much lower than projected if you have a lower salaried job during that period. This reduction is in addition to any actuarial reductions that you would experience if you choose to take retirement benefits before FRA.

There are tools and calculators available on my Social Security to help you with projecting your potential benefit with more accuracy. In addition, there are many tools available, some free and some paid, all around the internet.

If you have gaps showing in your earnings history, you may have had a job that was not covered by Social Security, so you will be interested in knowing how the Windfall Elimination Provision (WEP) affects you, and how the Government Pension Offset (GPO) may affect your family or benefits that you may be eligible for from your spouse. This is briefly covered in the right column, and if it is apparent that you might be impacted by WEP or GPO, there may be an additional fact sheet attached to your statement.

The bottom of the left column shows how much tax you and your employer have paid into the system over the years – both the Social Security system and Medicare system. This can be an eye-opener… quite often we don’t realize how the money we’ve paid in can stack up!

Third Page (there’s a third one?)

The Third Page of the statement lists Important Things to Know about Your Social Security Benefits. Hopefully you already know these facts, but just in case you don’t, it makes good sense to review them periodically. (For some folks, this list is provided on the second page of the statement and the overall statement is only two pages in length. I think most standard statements are three pages long these days, along with addenda listed below.)

Addenda

Included with your statement could be several addenda, depending on your circumstances. Among the possible addenda for your statement could be:

  • Retirement Ready Fact Sheet (everyone should get one of these, adjusted messages depending on your age)
  • Social Security Basics for New Workers (when you’re just starting out)
  • How You Become Eligible For Benefits (you’ll receive this until you have the required 40 quarters of coverage)
  • Additional Work Can Increase Your Future Benefits (you may receive this if you’ve begun recording zero years)
  • You Have Earnings Not Covered By Social Security (You will receive this if your earnings record indicates some of your earnings was not covered. This doesn’t mean WEP or GPO is part of your future, just that they might impact your future benefits.)
  • Medicare Ready (when you’re approaching age 65)
  • Supplemental Security Income And Other Benefits (you may receive this addendum if it appears by the facts that you might be eligible for SSI or other programs)
Posted on Jul 18th, 2022
by author: jblankenship.

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Posted in: Social Security, social security administration, social security benefits, social security retirement, Social Security spousal benefit.
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What Your Social Security Statement Is Telling You

Jul 11th, 2022
by jblankenship.
6 comments

making a statement

Photo credit: jb

There is a portion of your Social Security statement that is often a source of misunderstanding. The portion I’m talking about is the projection chart on the right-hand side of the first page.

If you’ll take a look at this portion of the statement, you’ll see a projection of your Social Security retirement benefits, at each age between 62 (unless you’re already past that age) up to age 70. Also listed elsewhere on the statement are the amounts that you would receive for Disability Benefits, as well as amounts that your family would receive upon your death as survivors.

What gets missed for many folks is the last line of the corresponding paragraph (just left of the chart) which states:

These personalized estimates are based on your earnings to date and assume you continue to earn $xx,xxx per year until you start your benefits.

With that short phrase comes a great deal of confusion and misunderstanding. This statement means that, assuming that you are something less than age 70, the statement reflects an assumption of your future earnings from now until those projected ages listed in the chart. Those amounts provided are based upon the assumption that you will continue earning at the rate most recently reported to SSA, usually what was on your tax return in the previous year.

If, for example, you chose to stop working at age 62 and delay receiving benefits until FRA, the benefit that you’ll receive will likely be less than the amount shown on your statement, because you did not continue earning at your current rate to FRA, as the projection assumes.

Another example is where you continue working, but your income has been reduced, due to layoff or other dramatic change in your employment. With the “great resignation” going on over the past few years, it’s not hard to imagine a situation where this might be the case.

Your future income might also be higher than the assumption, which could potentially result in a higher benefit than the chart indicates.

There are several calculators available on the Social Security website that can help you to get a clearer picture of your actual benefit if your projected earnings will be something different than what you’ve experienced up to the present (or actually, up to last year, since that’s all the more that is generally covered with the statement).

Posted on Jul 11th, 2022
by author: jblankenship.

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Posted in: Social Security, social security administration, social security benefits.
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