A lot of retirees don’t know that their monthly Social Security disability and retirement benefits may be federally and (in some states) state taxable. People who get monthly benefits from Social Security should know that they can have federal income tax taken out of their benefits. For federal retirees, voluntary federal income tax withholding from monthly Social Security retirement benefits may be a recommended and wise move, especially if a federal retiree is not having an sufficient amount of federal income tax being withheld from other sources of retirement income, such as a CSRS or FERS annuity or from the Thrift Savings Plan (TSP).
The advice to have federal income tax taken out of Social Security benefits is even more important for retirees who might get a “windfall” like a Social Security payment that was paid late or a refund of Social Security benefits that were underpaid in the previous year.
The Social Security Fairness Act (SSFA), passed into law on January 5, 2025, abolished the 40-year Windfall Elimination Provision (WEP) and Government Pension Offset (GPO). The GPO and the WEP reduced and in many cases eliminated Social Security benefits for millions of eligible Social Security beneficiaries, including thousands of federal retirees.
The SSFA has a “look back” period to the end of 2023. In many cases, federal retirees will receive a retroactive lump-sum payment for higher monthly benefit payments retroactive to January 2024, and higher monthly benefit payments starting in 2025.
The Social Security Administration (SSA) announced on February 25 that most WEP- and GPO- affected beneficiaries will receive their one-time retroactive lump sum payments by the end of March 2025 and higher monthly benefit payments will begin in April 2025. The SSA had said initially in January 2025 that because of understaffing and budget problems at the SSA, Social Security beneficiaries affected by the provisions of the SSFA should not expect their retroactive lump-sum adjustment payment and higher monthly benefit payments until early 2026.
While Social Security beneficiaries certainly welcome the additional Social Security payments to be received earlier than initially projected, there are tax planning items to be considered for the year 2025, especially when it comes to federal income taxes. Here are several of those items:
Many people approaching retirement age are unaware that Social Security offers a little-known option: the lump sum payment benefit. If you’re nearing retirement or already past your full retirement age, this strategy could provide you with a significant one-time cash infusion – but it comes with important tradeoffs you need to understand.
What Exactly Is a Social Security Lump Sum Payment?
A Social Security lump sum payment is essentially a retroactive benefit payment that allows eligible retirees to receive up to six months of benefits in a single payment. This option is available specifically to individuals who have reached their full retirement age (FRA) but haven’t yet filed for their benefits.
Say you were born in 1958 and your full retirement age is 66 and 8 months. If you wait until age 67 and 2 months to start collecting benefits, you could ask for a lump sum payment that covers six months of benefits that you should have received earlier. If you were 55 years old and your monthly benefit was $2,500, you might get a one-time payment of $15,000.
It’s important to note that this is different from the $255 lump-sum death benefit payment that Social Security provides to eligible survivors. These are completely separate programs.
Who Qualifies for a Social Security Lump Sum Payment?
To be eligible for this benefit, you must meet several key criteria
- You must have reached your full retirement age (which ranges from 66 to 67, depending on your birth year)
- You must not have already filed for retirement benefits
- You cannot request benefits that pre-date your full retirement age
As noted by the Social Security Administration, if you decide at age 67 that you want to file retroactively but your FRA is 66 and 8 months, you’d only get four months of benefits in your lump sum (not the full six months), because the rules prohibit claiming benefits that pre-date your full retirement age
How Does the Lump Sum Payment Calculation Work?
The calculation for your lump sum payment depends on several factors
- Your Primary Insurance Amount (PIA): This is based on your highest 35 years of indexed earnings
- Your Full Retirement Age: Currently between 66 and 67, depending on birth year
- The retroactive period requested: Up to six months maximum
For those born in 1958, full retirement age is 66 and 8 months. For those born in 1960 or later, it’s 67.
Your monthly benefit amount times the number of backdated months (up to six) you’re eligible for will give you the amount you’ll get.
The Significant Drawbacks to Consider
While a large one-time payment might sound appealing, this strategy comes with important downsides:
1. Permanent Reduction in Monthly Benefits
As soon as you take a lump sum payment, you lose the credits you’ve earned for delaying retirement for those months. In the future, your monthly benefit will be calculated the same way it would have been if you had applied earlier.
If you’re 68 years old and take a six-month lump sum, your monthly benefit will always be based on when you filed, not when you were 68. This means you won’t get the 8% annual increase, which is about $200. 67% per month) that comes with delaying benefits.
2. Tax Implications
Receiving a large lump sum could push you into a higher tax bracket for that year. Depending on your income, up to 85% of Social Security benefits may be taxable. The federal government taxes benefits when your “combined income” (adjusted gross income + nontaxable interest + half of your Social Security benefits) exceeds certain thresholds:
- 50% of benefits may be taxed if combined income exceeds $25,000 (single) or $32,000 (married filing jointly)
- Up to 85% of benefits may be taxed if combined income exceeds $34,000 (single) or $44,000 (married filing jointly)
3. Impact on Medicare Premiums
If the lump-sum payment boosts your yearly income over $106,000 (or $212,000 for married couples filing jointly), it could increase your future Medicare premiums due to income-related monthly adjustment amounts (IRMAA).
4. Reduced Survivor Benefits
The choice affects not just your benefits but potentially your spouse’s or other eligible family members’. The reduced monthly payment will impact survivor benefits after you die.
How to Apply for a Social Security Lump Sum Payment
If after considering the tradeoffs, you decide a lump sum payment is right for you, here’s how to apply:
- Contact the Social Security Administration either online at ssa.gov, by phone at 1-800-772-1213, or in person at your local Social Security office
- Prepare necessary documents including your Social Security card, birth certificate, and proof of income
- Complete the required forms with your personal and financial details, including the specific period for which you’re requesting the lump sum
- Wait for processing – the time varies but typically takes several weeks
The SSA will review your application to confirm eligibility before approving the payment, which will be deposited directly into your bank account.
Strategic Considerations for Your Decision
The lump sum option isn’t ideal for everyone. Here are some factors to weigh before making your decision:
- Life expectancy – If you expect to live a long time, forgoing the lump sum to maximize monthly benefits may be better in the long run
- Immediate financial needs – A lump sum might help with urgent expenses like medical bills or home repairs
- Other income sources – Consider how this fits with your overall retirement income strategy
- Tax situation – Consult a tax professional about how the lump sum might affect your tax liability
I often tell my clients that while the immediate cash might seem tempting, the long-term math usually favors maximizing your monthly benefit if you’re in good health and expect to live into your 80s or beyond.
Real-World Example
Let’s look at how this might work in practice:
Sarah was born in 1958, making her full retirement age 66 and 8 months. Her monthly benefit at FRA would be $2,500. She decides to file for benefits at age 67 and 2 months.
- Option 1: Take current benefits with no lump sum. Her monthly benefit would be approximately $2,680 due to delayed retirement credits.
- Option 2: Take a 6-month lump sum. She receives $15,000 upfront but her ongoing monthly benefit reduces to $2,500 (her FRA amount).
Over 20 years, the difference between these options is significant:
- Option 1: $2,680 × 240 months = $643,200
- Option 2: $15,000 + ($2,500 × 240 months) = $615,000
The difference of $28,200 shows why this decision shouldn’t be made lightly!
Common Misconceptions
There are several misunderstandings about Social Security lump sum payments:
-
Myth: You can get all your future benefits as one lump sum.
Reality: The lump sum option is limited to a maximum of six months of retroactive benefits. -
Myth: You can request a lump sum payment at any age.
Reality: You must have reached your full retirement age to be eligible. -
Myth: Taking a lump sum has no effect on future benefits.
Reality: It permanently reduces your monthly payment amount.
When a Lump Sum Might Make Sense
Despite the drawbacks, there are situations where taking the lump sum could be advantageous:
- You have a shorter life expectancy due to health issues
- You have an immediate need for a large sum of money
- You have sophisticated tax strategies that can offset the tax impact
- You’re already wealthy and maximizing monthly income isn’t your primary concern
Bottom Line: Is It Worth It?
For most retirees, maximizing monthly benefits by delaying claiming will provide more lifetime income than taking a lump sum payment. However, everyone’s financial situation is unique.
The best approach is to consult with a financial advisor who specializes in retirement planning. They can help you analyze the long-term implications based on your specific circumstances, health outlook, and financial needs.
Remember that this decision, once made, cannot be reversed – so take your time, do your research, and choose the option that best supports your long-term financial security.
Have you considered how a lump sum payment might fit into your retirement plan? Understanding all your Social Security options is crucial for making the best decision for your financial future.
The Lump Sum Social Security Payout
FAQ
What is a lump sum payment in social security?
A lump sum Social Security payment can be either a one-time $255 death benefit for a surviving spouse or child, or a retroactive payment of up to six months of retirement benefits for someone who delayed claiming after reaching their full retirement age.
What happens when Social Security sends a lump sum?
Your monthly benefit will be permanently lower. The lump sum payment could push you into a higher tax bracket for the year, costing you more in income tax. Some people think that investing the lump sum won’t give them a better return than the 8% annual benefit boost they get by waiting to claim it.
Is it better to take a lump sum payout or monthly pension?
Generally speaking, take the lump is a better idea. You earn more in the short term, pensions are typically not inflation indexed, you control it, and you can pass it along to your heirs.
What are the requirements for a SSS lump sum?
To get an SSS (Philippines) lump sum retirement benefit, you must have paid at least 120 monthly contributions but less than 120 pension contributions, be at least 60 years old (optional) or 65 years old (mandatory), and be too old to work. You’ll need your SSS/UMID card, proof of bank account, and identification, and must apply online via the My. SSS portal or manually for special cases.
Does social security pay a lump sum?
A lump-sum payment is a one-time Social Security payment that you received for prior-year benefits. For example, when someone is granted disability benefits they’ll receive a lump sum to cover the entire time since they first applied for disability. This period could cover months or years. Does Social Security have a lump-sum benefit?.
What is a lump-sum social security payment?
A lump-sum payment is a one-time Social Security payment that you received for prior-year benefits. For example, when someone is granted disability benefits they’ll receive a lump sum to cover the entire time since they first applied for disability. This period could cover months or years.
What is a social security lump sum benefit?
This is the annual benefit boost they would normally receive by waiting until age 70 to make the claim. The amount of money they would get from Social Security retirement benefits will go down forever after they get the lump sum. Given the pros and cons of the Social Security lump sum benefit, how should your client deal with this feature?.
How many lump sum benefits does a client receive from Social Security?
Apart from these lump sum benefits, there are at least two more lump sums that your client might receive from their Social Security. This is a federally funded benefit managed by the SSA. Under this benefit, the surviving spouse or child of the deceased worker receives a one-time payment of $255.
Does the SSA offer a lump sum cash payment?
The Social Security Administration still is doing a disservice by coaxing applicants into taking the optional lump sum cash payment when they sign up. The beneficiaries more than pay for it over the long term. The lump sum option isn’t new. But many applicants don’t know about it until the SSA offers it to them when they apply for benefits.
Will Social Security pay me 6 months of benefits as a lump sum?
“The Social Security Administration offered to pay me 6 months of benefits as a lump sum payment,” the reader said in the email. It surprised him that this “generosity” would be offered by the agency.