A Social Security Buy-Back Makes Sense in Some Situations

Paying back benefits is a smart money move for some retirees

Social Security allows you to pay back benefits.
You can pay back Social Security within 12 months of filing. Tetra Images

Life happens. You might decide that it's time to begin collecting Social Security benefits, then circumstances change and you realize that you really don't need them just yet after all, or that it might actually hurt you later if you begin collecting now. It's OK—the Social Security Administration understands and accommodates changes of heart, at least to some extent. 

If you file for Social Security then change your mind about receiving benefits just yet, you can withdraw your application up to 12 months after the time you filed for benefits.

But there's a catch. You must pay back any benefits you received in the interim, as well as any benefits your child or spouse received based on your earnings record. 

Why Might Someone Pay Back Social Security Benefits? 

When you reimburse Social Security for your received benefits, you effectively "buy back" your right to collect later, typically on better terms. There are a few reasons why you might decide to do this. 

  • You were unemployed but now you're working again: Maybe you were out of work so you filed for benefits before you reached your full retirement age, known as your FRA. When you file early, you receive a permanently reduced monthly benefit amount. And if you begin working again, you'll receive benefits before you reach your FRA and you may earn more than the earnings limit imposed by Social Security. This means your benefits will be further reduced! In this situation, it might be a smart long-term move to figure out how to pay back the benefits you did receive and start over. The end result would be just the same as if you had never filed to begin collecting in the first place. You can then reapply for benefits several years later when you're older and you'll receive a larger monthly amount.
  • You didn't consider the impact on your spouse: You're married. Suppose you've historically earned more than your spouse. You might have filed for benefits early not realizing the impact this would have on the future survivor benefit available to her. You might realize that it would be more beneficial for her if you wait until age 70 to file for Social Security. 
  • You still make plenty of money and you want an inflation-adjusted longevity hedge: Maybe you're still working but you filed for benefits at age 66 or 67 based on someone else's rather poor advice. But now you've done some financial planning of your own and you've educated yourself. You realize that you can get more inflation-adjusted income if you pay back the benefits you've received and restart them at age 70. Social Security provides a guaranteed inflation-adjusted income for life. Having this larger monthly amount at age 70 adds a good deal of security to a retirement income plan. 

How Do You Pay Back Benefits?

Don't worry—the Social Security Administration will provide you with detailed instructions. First, complete and file a form to withdraw your application for benefits. It's on the Social Security Administration's "if you change your mind" page, along with some additional information. The SSA will review the form and be in touch to tell you how much you owe and how you should remit the amount. . 

There May Be Tax Issues 

If you filed a tax return while you were collecting Social Security benefits and the return showed those benefits as being received, you may have to file an amended return if you decide to repay the benefits.

It depends on whether your benefits were taxed on the return, and this isn't always the case. If you had little or no income other than Social Security that year, you probably didn't pay income tax on your benefits so there's no problem and no need to take the additional step of amending your return. But if you did pay tax on your benefits, you'll want to recoup that money you paid and this necessitates filing a new return. Take your old tax return to a good tax professional for review so you're sure just where you stand. 

The Old Rule

It used to be that you could collect benefits for several years, then pay them back, then restart your benefit at a new higher amount later. This tactic was often described as an "interest-free loan" from the government. New rules eliminated this option in December 2010 to prevent wealthier retirees from taking advantage of this interest-free loan provision.