Most Social Security recipients receive monthly payments.
However, many people don’t know that you can claim a portion of your benefit as a lump sum.
How does a lump sum payment work?
Most people know Social Security benefits come in the form of monthly payments. You may qualify to get part of your entitlement and a lump sum instead. However, you will need to satisfy certain requirements to be considered eligible.
You can start claiming Social Security payments as early as 62, but your benefit will be permanently reduced. If you want to receive the full monthly benefit you need to wait until at least 66. If you really want to increase your benefit, try to delay claiming until age 70. In order to be eligible for the lump sum payment, you must have reached your full retirement age(FRA).
The Social Security Administration (SSA) will provide a back payment for up to six months worth of benefits. This option is available for those who opted to delay claiming benefits at their designated FRA.
For example, if your FRA was 66 and you decided to delay claiming, your future entitlement will increase. But when you decide to start claiming, you could opt to receive your six months worth of back pay as a lump sum. If your full retirement benefit was $2,000 a month– you could claim up to $12,000 a s lump sum. Keep in mind that this would reduce your delayed retirement credits and affect the size of your future payments.
Would a lump sum payment impact my taxes?
A lump sum may sound tempting, but up to 50% of your Social Security benefits can be taxed if you make more than $25,000 a year and up to 85% if your income exceeds $34,000. These figures are proportion of payments that are subject to federal income tax– not the rate at which they will be taxed.
Lump sum payments could tip you into a higher tax bracket– which would mean more of your benefit being taxed.