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Social Security Closes Free Loan Loophole

Before the Social Security Administration published new guidance [3] to change it, you could effectively take an interest free loan against your Social Security benefit if you were eligible to receive benefits. Once you were eligible to receive benefits, you could start taking your benefits early (and thus a reduced benefit) and then withdraw your benefit application once you hit full retirement (and thus maximum SSA benefits). Once you withdrew your application, you’d have to pay back the benefits you received. Once you did that, you were all square with the SSA and you could continue to wait until full retirement age, when you’d receive the maximum benefit. The end result was an interest free loan.

You can start taking Social Security benefits at age 62 but it’s reduced compared to what you’d at 66, which is full retirement age. You would start claiming the benefits at 62, put them in an interest bearing account, and then withdraw your application when you turned 66. At that point, you’d pay back whatever benefits you received and keep the interest. Then immediately apply again and get full benefits.

The door has pretty much been closed on the free loan loophole (OK, technically it’s been shut to a sliver) when the SSA created a 12-month deadline to withdraw your application. In other words, you can get a loan but it’s only for a year. A percent or two in interest each year for four years might be worth the paperwork but it’s not really worth it for just 12 months.

Hat tip to the fine folks at the NY Times Bucks blog [4], where I first read about this change.

(Photo: thehi [5])