Social Security Buy Back Makes Sense in Some Scenarios

For Some, Paying Back Benefits Will Be a Smart Money Move.

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

If you file for Social Security benefits, then change your mind and don't want to receive benefits, if you are within 12 months of the time you filed for benefits you have the option to withdraw your application. To withdraw your application you must pay back any benefits you received, and any benefits a child or spouse received based on your earnings record. 

Why Might Someone Pay Back Social Security Benefits? 

I can think of several scenarios where it might be wise to pay back benefits.

I cover three common ones below.

You were unemployed and are now re-employed. Perhaps you were unemployed and filed for benefits before reaching your full retirement age (FRA). When you file early you receive a permanently reduced monthly benefit amount. Now, assume you are back to work. If you work, are receiving benefits before your FRA, and make more than the earnings limit, your benefits will be further reduced! In this situation, it might be a smart long-term move to figure out how to pay back benefits so that it becomes as if you had never filed in the first place. Then several years later you can reapply for benefits at an older age and get a larger monthly amount.

You didn't consider the impact on a spouse. Another reason to pay back benefits might be in the case of a married couple. Suppose you are the highest earning spouse. You may have filed for benefits early not realizing the impact this would have on the future survivor benefit available for your spouse.

After running your financial plan you may realize it would be more beneficial for you to wait until age 70 to file. This would be another situation where paying back benefits would make sense.

You still make plenty and want an inflation-adjusted longevity hedge. Perhaps you are still working and filed for benefits at 66 or 67 thinking that is what you should do.

Now you started doing some planning of your own and realize that you can get more inflation-adjusted income if you pay back benefits and restart them at 70. Social Security provides guaranteed inflation-adjusted income for life. Having this larger monthly amount at 70 adds a good deal of security to a retirement income plan. If this is you, this may be a wise option.

How Do You Pay Back Benefits?

The technical way you pay back benefits is to file a form to withdraw your application for benefits. Social Security reviews the form and then lets you know the amount to pay back. You can find additional information and a link to the form on the Social Security Administration's "if you change your mind page".

Taxes

If you received benefits, have already filed a tax return showing those benefits received, and want to pay benefits back, you may need to file an amended return. It all depends on whether your benefits were taxable in the first place. If you had little income other than Social Security than you likely did not pay tax on your benefits. But if you did pay tax on them, you'll want to recoup the taxes paid. You can sort through the rules in IRS Publication 915 to figure out what to do, or you can work with a good tax professional and let them handle it.

Old rules

Prior to 2010, you could collect benefits for several years, then pay them back, and restart your benefit at a new higher amount. This option was often described as an interest-free loan from the government. 

In December 2010, new rules eliminated this option and stopped wealthier retirees from taking advantage of this interest-free loan provision.