Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
OMY to boost SS & Roth Conversion questions
Old 11-27-2017, 07:18 AM   #1
Full time employment: Posting here.
Luck_Club's Avatar
 
Join Date: Dec 2016
Posts: 714
OMY to boost SS & Roth Conversion questions

Woke up wondering about adding more work years to boost SS payment, and also considered Roth conversions. Anyone want to check the math and logic of my conclusions?

So as I ran the numbers I came up with the following. Basically every additional year of work would add approximately $60,000 in earnings to my 35 working years. When running through all the calculations it will add approximately $21 per month of Social Security income. Due to the self-employed nature of my earnings that will require me to pay $9180 in additional SS taxes & Medicare taxes @the full 15.3%, per year of working.

This would require a 36 year payback!

Ignoring the additional income I would receive during the OMY, am I missing something or is it dumb in my position to engage in OMY for SS benefit goosing?

On to Roth Conversions:

I've known for some time that as I reach 79.5 MRD, I'm going to have a tax issue. I'm going to owe a ton. This is a good problem to have, and surely beats the alternative. Having concluded from the above that OMY isn't worth it for goosing SS, I began noodling the logic of Roth Conversions prior to collecting SS. I'm anticipating about $60K a year in rental income, and may inherit some IRA's which will have RMD prior to 62 as well. This tax situation only gets worse as I hit age 72.5, any RMD on the inherited IRA's are going to be quite large, and have my own RMD's added into the mix.

In exploring Roth conversions, I come up with some immediate concerns:
1) Do you pay SS tax & Medicare taxes on the converted amounts?
2) After a conversion are you allowed to withdraw the converted funds penalty free? IE I take $100K from a IRA Pay $25K in tax, then a year, or some other time prior to age 59.5, pull out $75K tax free?
3) How do conversions vs straight IRA withdrawals impact SS income?


Due to family longevity, I'm leaning towards collecting SS @62, so I see about a 10 year window to do conversions with the least income impact. Not sure if I might change this for spousal survivor reasons in the future.
__________________

__________________
2017 dry run spending: 2018 accelerate debt elimination: 2019 RV procurement & 1MY begins: 6/19 DW last month went early: 9/19 start cross country loop: 1/20 first reinforcements arrive. 6/20 sell business or shut doors. 9/20 begin globe trot: 4/26 401K reinforcement.
Luck_Club is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Old 11-27-2017, 08:08 AM   #2
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
pb4uski's Avatar
 
Join Date: Nov 2010
Location: Vermont & Sarasota, FL
Posts: 24,295
I concluded that the negligible impact of working additional years on my SS benefit were not worth it... when you already have enough freedom to have time to use the way you want is worth more than giving up $21/month... and I was only paying 1/2 of my SS.

There are no SS or Medicare taxes on Roth conversions. (In most cases, you have already paid SS and Medicare taxes on that income).

If you are under 59 1/2, there is a 5 year clock on each Roth conversion. If you are over 59 1/2, you can withdraw freely. Conversions and IRA withdrawals impact income the same... in both cases they are "pension" income on your tax return.

BTW, MRDs begin at 70 1/2, not 79.5 or 72.5... typos I suspect.

Roth conversions are very worthwhile before SS... particularly if your tax on the conversion is lower than your tax rate once SS starts... you are saving real $.

On the other... paying a ton of taxes once SS starts, I think of it this way... if my marginal tax rate on withdrawals/conversions is lower than when I deferred that income then I won.... if my marginal tax rate on withdrawals/conversions is higher than when I deferred that income then I have been more successful that I expected that I would be when I deferred the income so that is also a win... either way, I win.
__________________

__________________
If something cannot endure laughter.... it cannot endure.
Patience is the art of concealing your impatience.
Slow and steady wins the race.

Retired Jan 2012 at age 56...target 65/35/0 AA
pb4uski is offline   Reply With Quote
Old 11-27-2017, 08:13 AM   #3
gone traveling
 
Join Date: Mar 2015
Posts: 3,508
Quote:
Originally Posted by Luck_Club View Post
Due to family longevity, I'm leaning towards collecting SS @62, so I see about a 10 year window to do conversions with the least income impact. Not sure if I might change this for spousal survivor reasons in the future.
For me, maximizing survivor benefits is one of the primary reasons for me to delay starting benefits to age 70.

I can't imagine doing any analysis of social security without considering that.
joeea is offline   Reply With Quote
Old 11-27-2017, 08:25 AM   #4
Thinks s/he gets paid by the post
 
Join Date: Dec 2014
Location: St. Charles
Posts: 1,719
Quote:
Originally Posted by pb4uski View Post
On the other... paying a ton of taxes once SS starts, I think of it this way... if my marginal tax rate on withdrawals/conversions is lower than when I deferred that income then I won.... if my marginal tax rate on withdrawals/conversions is higher than when I deferred that income then I have been more successful that I expected that I would be when I deferred the income so that is also a win... either way, I win.
My thoughts exactly!

I have no illusions about staying out of the 25% bracket when we hit RMD's, but we CAN convert and/or spend from the tIRA before then to lessen the tax bite.

And, in reality, most of our tIRA contributions were at the 25% bracket with some even at 28%. So, worst case, we break even on the tax hit. So, while paying higher taxes is not something we WANT to do, it ultimately means we won the game.
__________________
If your not living on the edge, you're taking up too much space.
Never slow down, never grow old!
CardsFan is online now   Reply With Quote
Old 11-27-2017, 09:10 AM   #5
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
RunningBum's Avatar
 
Join Date: Jun 2007
Posts: 8,996
One of the things I've learned here is that once you've had a lot of years of income, an extra year does very little to improve your SS benefits. Especially if you've got 35 years in already, and are just replacing a lower year with a higher one. I think you've already figured that out with the small $21/month bump.


I think it's wrong to just look at that though. Look at the whole picture of what another year of income does to your overall position. Essentially all income after taxes and business expenses gets added to your nest egg, since if you aren't working you are spending down some of your nest egg. I guess being self-employed probably means your health insurance situation isn't changing, and you aren't losing any other benefits because you were giving them to yourself, perhaps with tax benefits.


Compare all that to being free of work and having more time in retirement.
RunningBum is offline   Reply With Quote
Reply


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Questions about conversion of after-tax 401k to Roth IRA lindalou FIRE and Money 11 01-23-2017 01:29 PM
Noticed more people holding signs "need work or food" rayinpenn Other topics 3 05-03-2015 03:51 PM
Health Question: Constipation and Boost / Ensure BigMoneyJim Other topics 8 08-17-2006 03:59 PM
FORD To Boost Ethanol Awareness SteveR Other topics 7 11-10-2005 09:46 AM
Re: Giving The Economy a "Boost"? John Galt Young Dreamers 1 01-28-2005 08:16 AM

» Quick Links

 
All times are GMT -6. The time now is 05:24 PM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2020, vBulletin Solutions, Inc.