The Social Security mulligan

For golfers, a mulligan is a “do-over,” typically of your drive on the first hole. However, even the most avid golfer may not know that a mulligan is also available for your Social Security benefits.

If you are already collecting Social Security benefits or years away from collecting your benefits, knowledge of the Social Security “do-over” could provide for significant future financial benefits. Let’s look at how this “do-over” works.

For a single taxpayer, the “do-over” option is fairly easy to understand. For this article, we will assume a Full Retirement Age (FRA) of 66. We also assume that other financial resources are available, so that Social Security benefits are not required before age 70. Finally, we assume no inflation adjustment to the Social Security benefits

Between age 62 and your FRA you should begin collecting Social Security benefits in the first year in which you do not meet or exceed the “earnings test”. In 2010, annual earned income in of more than $14,160 exceeds the “earnings test”, which reduces benefits by one dollar for every two dollars earned above this amount. If the “earnings test” is always exceeded, begin taking your Social Security benefits at your FRA, when the “earnings test” is no longer applied.

Depending upon when Social Security benefits begin, you will receive between 75 percent and 100 percent of your “full” Social Security benefits until you reached age 70. It is recommended that all of the Social Security benefits received be saved and put into very safe investments such as CDs. At age 70, if you are in good health and expecting to live at least 10 or more years, you would revisit the Social Security offices to execute your “mulligan.”

The “mulligan” allows you to revisit the Social Security administration and repay all of the Social Security income that you have received. Only the amount of income received must be repaid. The interest or investment gain from these benefits is yours to keep.

When Social Security benefits are re-filed, monthly benefits increases to 132 percent of the FRA amount for the rest of your life. If you are in poor health at age 70, you would not pay back any Social Security benefits and would continue to collect the current amount for the rest of your life.

To maximize the “mulligan” approach, keep track of your taxes every year in which you take Social Security benefits before age 70. Run an alternate tax return scenario showing what taxes would have been without receiving any Social Security benefits. When you turn 70 and repay the benefits, file a tax Form 1341. This provides for a tax credit of the amount of additional taxes paid in the years before turning age 70.

If you are married, the “mulligan” option exists for each spouse. If one spouse has significantly higher Social Security benefits than the other spouse, it is especially important for the higher earning spouse to consider this option. Not only will the higher earning spouse receive 132 percent of FRA benefits for the rest of their lives, if this spouse predeceases the lower earning spouse, the survivor can claim the increased benefit for the rest of their lives. This approach assures that 132% of the FRA amount of the higher earning spouse will be available for both spouses lifetimes.

As there are so many benefit options available for couples, consult your local Social Security office or a financial planner, who is well versed on the complexities of Social Security, to determine the best approach for you and your spouse.

There are few “mulligans” in our financial lives with no downside. If you are age 62 or older and your earnings do not exceed the “earnings test,” consider beginning Social Security benefits now. If you are at your Full Retirement Age and have not begun taking Social Security, why not? Based on your health and expected longevity at age 70, you can determine whether to maintain your current payments or to repay the payments made and switch to significantly higher payments for the rest of your (and possibly your spouse’s) life.

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Wayne Farlow is the founder of Financial Abundance, LLC, providing fee-only financial planning, asset management and retirement planning services. He is the author of “Financial Abundance Guide,” available at www.finabguide.com . He can be reached by email at [email protected] or at 303-554-0309.