Let’s Bust These Five Social Security Myths

I wish I had $1 for every time someone told me that filing for Social Security retirement benefits was simple and straightforward. It’s often not.

Unfortunately, some clients are “DIY” (“do it yourself”) types who barrel into filing for Social Security benefits without consulting a financial advisor. And some advisors aren’t taking advantage of software available to them to chart the best scenario for each client situation.

Here are five Social Security “myths” that I regularly encounter in my work with financial advisors and their clients who are planning for retirement and want to optimize their Social Security benefits.

Myth #1: Social Security benefits come without taxes or other deductions.

Sorry, not true. The Social Security Administration (SSA) itself says that about 40 percent of people who receive benefits must pay income tax on them. There are income limits that dictate who pays income tax on benefits and what portion of your benefits you’ll pay taxes on.

For people who file joint returns, for example, if they earn a combined income of more than $44,000, up to 85 percent of their Social Security benefits are subject to income tax.

So, if you have income from other sources, such as investments or pensions, you’ll probably need to pay federal income tax on a good portion of your benefits.

If you are signed up for both Social Security and Medicare Part B medical insurance, your Part B premium will be automatically deducted from your benefit. And if you choose a Medicare Advantage or Part D (prescription coverage) plan, you can elect to have Social Security deduct and pay those premiums directly to your insurer.

Myth #2: There’s no ‘do over’ with Social Security filing.

Making a hasty and unexamined decision to file can cost you quite a sum in the total of benefits you stand to collect throughout the rest of your life. But Social Security does allow beneficiaries some wiggle room.

You can change your mind about filing you can withdraw your application within the first 12 months of collecting. You can only do it once, and you do need to pay the government back for what you collected. Repayment includes any Medicare benefits you had deducted from your Social Security benefit.

People who have reached their full retirement age but aren’t yet 70 can also suspend their benefits. They can earn retirement credits for each month that benefits are suspended, leading to a higher benefit in the future.

Myth #3: You must be retired (not working) to collect Social Security.

Social Security was started before medicine improved physical health and increased life spans. Now many people work well into their 60s and even their 70s. And many of them are collecting Social Security.

Here are the rules, in brief:

• If you collect Social Security before your full retirement age (FRA), the SSA may deduct your benefit by $1 for every $2 you earn over an income cap that it sets annually (for 2022, it is $19,560).
• In the year that you reach your full retirement age, the income cap is higher ($51,960 in 2022), and $1 is deducted from your benefits for every $3 earned.
• Once you reach full retirement age, there is no limit and no penalty for earning income.

Myth #4: If you worked, you are eligible for Social Security.

Not true. Certain government and railroad employees do not pay the taxes used to fund Social Security benefits and are not eligible for them. Teachers at public schools and some universities are examples of these groups. Likewise, survivors of people who fall into this category do not qualify for Social Security survivor benefits.

Of course, some individuals who fall into this category worked some of their careers in jobs where they did pay Social Security taxes. They may be entitled to Social Security benefits – although those benefits may be reduced.

This is a particularly complicated portion of Social Security regulations. If you fall into one of these categories, you should consult your human resources or pension expert.

Myth #5: When a spouse dies, the widowed spouse is eligible for both a survivor’s benefit and their own benefit.

In a way, but not both together. In other words, no one gets two benefits. Again, many factors can come into play, and the rules can be confusing. Check that: They are confusing.

A widowed spouse can receive survivor’s benefits at age 60 and not before. And there’s a full retirement age for survivor benefits that’s different from an individual’s FRA.

If a widowed spouse is eligible for their own Social Security benefit, they can collect a survivor benefit and then file for their benefit when they choose, perhaps at their FRA or age 70. A lot will depend on whether they are working or have other income sources.

These last two examples point out why spouses need to decide together on when each will file for Social Security.

In my next column, I’ll dive into more advice for married couples and examples of the differences we uncover at times in what they thought they could do and what turns out to be best for them.

Read the original post on TheStreet here.