How to Help Clients Make the Right Social Security Election: CPAs Need to Start by Focusing on Four Key Aspects of the Decision

By Sullivan, James | Journal of Accountancy, December 2013 | Go to article overview

How to Help Clients Make the Right Social Security Election: CPAs Need to Start by Focusing on Four Key Aspects of the Decision


Sullivan, James, Journal of Accountancy


EXECUTIVE SUMMARY

* The current and pending wave of retirements of the Baby Boomer generation makes it more important than ever for CPAs to understand how to help clients maximize Social Security benefits. To get started, advisers should concentrate on four key aspects of when clients should begin receiving benefits.

* Social Security has several categories of beneficiaries. Advisers need to determine which filing status yields the best benefit for clients.

* Two rules can substantially reduce Social Security benefits: the government pension offset and the windfall elimination provision.

* Social Security provides eligible individuals flexibility regarding the timing of receiving their benefits. The worker's benefit may begin as early as age 62, as late as age 70, or any time in between.

* Because people rarely know exactly how long they will live, it is always possible that a client will live long enough to exhaust his or her retirement savings. Planners need to use longevity protection strategies to safeguard against this.

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As the wave of Baby Boomer retirements continues, it is more important than ever for CPAs to understand how to help clients be in the best position to maximize Social Security benefits. Mastering the intricacies of the rules is no easy task, especially for accountants who don't concentrate full time on financial planning. Fortunately, a CPA does not have to be a Social Security expert to raise the topic with clients or answer basic questions. To help CPAs get started, this article presents a primer on what to consider when making the Social Security election.

To simplify the process, a CPA should ask the client to focus on four key aspects of the decision:

1. Which filing status yields the best benefit?

2. Are there reasons for a benefit reduction?

3. What issues affect the timing of starting the benefit?

4. Has the client carefully considered the longevity protection provided by Social Security?

Understanding these concepts allows the client to make a better informed decision regarding how to apply for and when to begin receiving Social Security. This article takes a look at each concept.

1. Filing Status

Social Security has several categories of beneficiaries. It is likely that clients are entitled to benefits in more than one category:

* Worker;

* Spouse or ex-spouse of a worker;

* Survivor of a worker (widow/widower; minor child/older disabled child; or financially dependent elderly parent at the time of the worker's death);

* The dependent of a worker (minor child/older disabled child).

A beneficiary may fit into more than one category. For instance, he or she may have earned both his or her own worker's benefit and also be entitled to benefits as a spouse. To fit into a particular category, the beneficiary may have to meet other requirements. For example, for an ex-spouse to receive benefits, he or she must, among other requirements, have been married to the worker for at least 10 years before the divorce.

To maximize a client's benefits, a CPA may recommend that a benefit be filed for in one category and later switched to another category. For example, lifetime benefits for a couple may be maximized if a client at full retirement age (FRA) files first for his or her spousal benefit and at age 70 switches to his or her own worker benefit. The FRA is the age at which a beneficiary is entitled to his or her full benefit. For Baby Boomers, the FRA is age 66 or older (see Exhibit 1).

2. Benefit Reductions

Two rules can substantially reduce Social Security benefits. These are (1) the government pension offset (GPO) and (2) the windfall elimination provision (WEP). Only clients who have worked for, or whose spouse has worked for, uncovered wages are affected by these provisions. …

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