As of January 1, 2024, significant changes have been implemented regarding Social Security spousal benefits, particularly affecting those who turn 70 this year. This article delves into the new rules, outlines strategies for maximizing benefits, and highlights tax-friendly states for retirees.
The End of a Longstanding Provision
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For decades, married individuals were allowed to alternate between their own Social Security benefits and those of their spouses to optimize their payments. However, the recent modifications to Social Security regulations mean that this option is no longer available for beneficiaries born before January 1, 1954. The Bipartisan Budget Act of 2015 altered the regulations, leading to the phasing out of certain spousal benefits. As a result, married couples must now adopt alternative strategies to maximize their Social Security advantages.
Key Strategies for Maximizing Social Security Benefits
With the expiration of the previous spousal benefit provision, couples must carefully consider their options. Here are three essential strategies to keep in mind:
1. Review Estimated Benefits and Plan Ahead
It is crucial for couples to discuss and strategize about their Social Security claims. The Social Security Administration allows individuals to check their estimated benefits, which vary depending on the claiming age. Typically, the lower-earning spouse can receive either their own benefit or the spousal benefit, whichever is higher. Setting up an online account with the Social Security Administration can help couples evaluate their benefits and determine the best time to claim them.
2. Avoid Early Claiming Before Full Retirement Age
While beneficiaries can start receiving Social Security as early as age 62, doing so often leads to a permanent reduction in monthly payments. For instance, a person who claims benefits at 62 could see their monthly payment drop significantly compared to what they would receive at their full retirement age (FRA). For those born after 1960, the FRA is 67. If a spouse claims benefits early, the other spouse risks losing part of their spousal benefit as well. Therefore, waiting until at least full retirement age can help maximize total benefits.
3. Consider Delaying Benefits Wisely
Though delaying Social Security benefits until age 70 typically results in higher monthly payments, this strategy may not be advantageous for spousal benefits. A spouse can only receive up to 50% of the primary beneficiary’s full retirement benefit, meaning they do not benefit from the delayed retirement credits associated with waiting until age 70. Hence, it’s essential to analyze individual circumstances and plan accordingly.
Where to Retire: States With Favorable Tax Policies
Retirement planning goes beyond Social Security benefits; taxes can significantly impact retirees’ finances. Here are three states known for their favorable tax treatment of Social Security benefits:
1. Delaware
Delaware boasts no state or local taxes, making it an attractive option for retirees. Although there is a graduated income tax that ranges from 2.2% to 6.6% for those aged 65 and older, the absence of state or local sales tax benefits residents. Additionally, the effective property tax rate is relatively low at 0.61%.
2. New Hampshire
Another top contender for tax-friendly retirement is New Hampshire. The state does not impose any sales tax or income tax on wages, and there is no tax on Social Security benefits. However, it does levy a 4% tax on interest and dividends income. While property taxes can be high at 1.93%, many retirees appreciate the lack of sales and Social Security taxes.
3. Wyoming
Wyoming is a prime destination for retirees seeking tax relief. The state has no income tax, including on Social Security benefits, and a relatively low effective property tax rate of 0.56%. Although it does have a sales tax averaging 5.36%, the overall tax burden remains manageable for retirees.
Conclusion
As the Social Security spousal benefits landscape evolves, it’s crucial for couples to stay informed and adapt their strategies accordingly. By reviewing estimated benefits, avoiding early claiming, and considering their retirement options carefully, individuals can optimize their Social Security benefits. Additionally, exploring tax-friendly states can help retirees maximize their financial well-being in retirement.