SS income vs ROTH conversions

[pugmom]

Hubby (age 65) and I (64) are FIREd since 2017 and 2019 respectively. We do NOT need SS to live on. That being said, we thought we would go ahead and take it (both of us) next year after I start Medicare (we have been keeping our income as low as possible for health insurance reasons).
I have just started looking at how SS income is taxed. Because we both had professional jobs we will receive pretty high monthly SS income... I am guessing at least 48K per year. So according to one calculator I tried, this would mean that we would pay taxes on 85% of that SS income, plus on about $15K investment income, plus whatever we decide to withdraw from our IRAs.
Here is my question (I am explicitly not trying to be too detailed here):
Instead of taking SS for a few years, would it make sense to do ROTH conversions for as large amount as we were willing to bite the bullet and pay taxes for? It now seems likely that we will end up with over $100K of income once we start taking SS. Delaying SS more or less makes it easier to do the ROTH conversions....

 

[pb4uski]

Yes, and that is exactly what we did/are doing. While I think delaying SS is smart in our case, another reason for delaying SS is to give us more headroom to do low tax-cost Roth conversions. Our Roth conversions for 2021 and 2022 will cost us about 11.4% in federal income taxes... much lower than the 22% federal income tax that we would likely have on RMDs, much less than the 28% or more that we avoided paying when we deferred that income and also lower than our heirs marginal tax rates.

You may want to visit opensocialsecurity.com and assess your optimal SS claiming strategy and compare it to an alternative claiming strategy of delaying until age 70. In our case, the expected present valuse between the optimal claiming strategy and delaying until age 70 are not very significant, so the Roth conversion tax savings are the cherry on top.

 

[RunningBum]

One of the reasons I'm planning to delay SS is to do more Roth conversions.

 

[Z3Dreamer]

I am playing the same game as you. About the same age. When to take SS is one of the most debated topics on here.

I opted for taking SS earlier for many reasons and back filling the lower tax brackets with distributions and Roth conversions. Capital gains at those lower brackets are very low. But you have to do the spreadsheet for a number of years. A big question is what tax bracket will you be in once you start the RMDs? In my case, it was not going to be a high tax bracket so it doesn't make sense to do massive Roth conversions. Only little conversions to fill the lower tax brackets.

 

[pb4uski]

The real sweet spot for doing low tax-cost Roth conversions is in the 10% and 12% tax brackets if you'll be in the 22% tax bracket once pensions, SS and RMDs are going.

If you're already in the 22% tax bracket are going then there is a lot less benefit unless your tax deferred accounts are huge. Similarly, if will be in the 12% tax bracket once RMDs are going then there isn't much bang for the buck from Roth conversions, but it doesn't hurt either.

 

[pugmom]

" unless your tax deferred accounts are huge"

Yes

 

[Dash man]

We are doing large Roth conversions to the top of the 24% bracket, but I am taking social security now, while my wife is holding of until 70. The reason is my longevity is very questionable from family history and coronary artery disease. DW will get the higher benefit from social security, so there is no benefit to my waiting.
Looking ahead to when RMDs begin, we’ll be in a higher tax bracket than the 24% we’re in now if we don’t do this, and even worse when one of us passes.

 

[old medic]

Similar to our plan, 58/53 and I'm done the end of the month. Rolling max into Roth up to our 12% cap each year until she retires. We will be in the 22% once we both are on pension/SS.... So makes sense to convert to future RMDs to a Roth now.

 

[Exchme]

Pugmom is not getting very specific responses because there is a lot of guesswork involved in understanding her situation. Putting clues together, she told us that both she and hubby were high paid professionals, that their SS benefits combined will be $85K plus they will have $15K dividends and that their tax deferred accounts are huge.

So I will assume we are talking about a taxable balance at around $1M and $3+M in tax deferred. (Two professionals maxing out 401ks plus a good company match could do $2+M each).

That would mean that unless they try really hard to Blow That Dough, they will have an estate. We haven't heard about life goals such as maximizing their estate for their heirs (favoring Roth Conversions) vs. giving the estate to charity (limiting the value of Roth Conversions). They can do $100K/yr QCDs from tax deferred once they are 70.5 and there are other possible uses for tax deferred later in life like Long Term Care. However with the very large account values that two professionals could stack up, there is probably enough for all that and Roth Conversions too.

The tax laws on the books are for tax rates to increase in 2026 which would also favor Roth Conversions now. My guess is that deferring SS to age 70 and doing Roth Conversions to the top of the 24% bracket until then is probably in the ballbark. It’s a lot of money and worth doing some modeling. If pugmom or hubby don't want to tackle that, they should hire a CFP that works by the hour (not an AUM advisor) to do some modeling.

 

[pugmom]

Pugmom is not getting very specific responses because there is a lot of guesswork involved in understanding her situation. Putting clues together, she told us that both she and hubby were high paid professionals, that their SS benefits combined will be $85K plus they will have $15K dividends and that their tax deferred accounts are huge.

So I will assume we are talking about a taxable balance at around $1M and $3+M in tax deferred. (Two professionals maxing out 401ks plus a good company match could do $2+M each).

That would mean that unless they try really hard to Blow That Dough, they will have an estate. We haven't heard about life goals such as maximizing their estate for their heirs (favoring Roth Conversions) vs. giving the estate to charity (limiting the value of Roth Conversions). They can do $100K/yr QCDs from tax deferred once they are 70.5 and there are other possible uses for tax deferred later in life like Long Term Care. However with the very large account values that two professionals could stack up, there is probably enough for all that and Roth Conversions too.

The tax laws on the books are for tax rates to increase in 2026 which would also favor Roth Conversions now. My guess is that deferring SS to age 70 and doing Roth Conversions to the top of the 24% bracket until then is probably in the ballbark. It’s a lot of money and worth doing some modeling. If pugmom or hubby don't want to tackle that, they should hire a CFP that works by the hour (not an AUM advisor) to do some modeling.

Most of this is correct. But we have no children and do NOT intend to leave an estate. Last May DH was diagnosed with melanoma.. fortunately he had it removed and is considered clear. But we are ready to start drawing down IRA $, whether to convert to ROTH or spend. Of course Covid has basically blown (for now at least) our hopes for doing an expensive vacation (cruises) each year.

 

[pb4uski]

The real sweet spot for doing low tax-cost Roth conversions is in the 10% and 12% tax brackets if you'll be in the 22% tax bracket once pensions, SS and RMDs are going.

If you're already in the 22% tax bracket are going then there is a lot less benefit unless your tax deferred accounts are huge. Similarly, if will be in the 12% tax bracket once RMDs are going then there isn't much bang for the buck from Roth conversions, but it doesn't hurt either.

" unless your tax deferred accounts are huge"

Yes

What I was alluding to is if with no Roth conversions you are in the 22% tax bracket ($81,050 to $172,750 of taxable income for MFJ for 2021) but because your tax-deferred balances are huge you expect RMDs to push you into the 32% tax bracket ($329,850 to $418,850) or higher, then the 10% savings from Roth conversions is worthwhile. Ditto for 10% or 12% vs 22%.

OTOH, if you're already in the 22% bracket and RMDs will put you in the 24% bracket ($172,750 to $329,850) then the 2% savings isn't much bang for the buck.

 

[TheWizard]

Yes, I did the same as the OP and most others said, starting age 70 SS last year and now RMDs next month.
So I'm pretty much done doing significant Roth conversions after this month...

 

[skyking1]

what Pb4ski has said. DW might take hers early but I will delay and roth convert to the top of 12% for 7 years. It will practically wipe out her tIRAs and eliminate RMD as a question.

 

[Sunset]

What I was alluding to is if with no Roth conversions you are in the 22% tax bracket ($81,050 to $172,750 of taxable income for MFJ for 2021) but because your tax-deferred balances are huge you expect RMDs to push you into the 32% tax bracket ($329,850 to $418,850) or higher, then the 10% savings from Roth conversions is worthwhile. Ditto for 10% or 12% vs 22%.

OTOH, if you're already in the 22% bracket and RMDs will put you in the 24% bracket ($172,750 to $329,850) then the 2% savings isn't much bang for the buck.

Agreed... Until one dies, and the spouse files as single, then income of ~$165K puts that single filer in the 32% bracket, and $210K for the 35% bracket.

 

[Sunset]

We are delaying SS for all the reasons:

1. SS is a great annuity with inflation protection, so get the max.
2. Delaying gives us room to decrease our too big IRA's.
3. Roth conversion builds an account that gives us a tax free source later for flexible spending of large amounts (ex buy a second home).
4. Reducing the RMD's will have large impact on the survivor and some impact for both.

We keep in mind the extra penalties for driving income too high, so limits our conversions to not trigger those as we are over age 63 so Medicare looks at income:

• NIIT
• IRMAA ($182K) - this is the real limit for us now.

 

[skyking1]

we are leanFIRE so that I don't even know who Irma is. Maybe somebody's aunt?

 

[Dash man]

We figured paying IRMAA now for a few years by doing large Roth conversions will allow us to pay less later on. The NIIT will eventually go away too as we reduce our taxable account balances to pay taxes on the conversions.

 

[Dash man]

we are leanFIRE so that I don't even know who Irma is. Maybe somebody's aunt?

Just Google IRMAA and you’ll find plenty of info.

 

[Dtail]

we are leanFIRE so that I don't even know who Irma is. Maybe somebody's aunt?

The big hurricane from 2017.

 

[skyking1]

Just Google IRMAA and you’ll find plenty of info.

"IRMAA ($182K) - this is the real limit for us now."

LOL not going to be our problem, I just looked up thread for this nugget.
If we survive long enough to bump into THAT, it will be a happy problem.

 

[pugmom]

Thanks again to all.... this will take me a while to digest all of it. I have made it this far in life and never had to think about tax brackets... :-( But as people often say: these are good problems to have.

 

[pb4uski]

Agreed... Until one dies, and the spouse files as single, then income of ~$165K puts that single filer in the 32% bracket, and $210K for the 35% bracket.

True. Good point.

 

[Markola]

The real sweet spot for doing low tax-cost Roth conversions is in the 10% and 12% tax brackets if you'll be in the 22% tax bracket once pensions, SS and RMDs are going.

If you're already in the 22% tax bracket are going then there is a lot less benefit unless your tax deferred accounts are huge. Similarly, if will be in the 12% tax bracket once RMDs are going then there isn't much bang for the buck from Roth conversions, but it doesn't hurt either.

That’s a simple rule of thumb for any discussion of Roth conversions. Thanks. RCs don’t make sense for us.

 

[FI_RElater]

we are leanFIRE so that I don't even know who Irma is. Maybe somebody's aunt?

IRMAA is directly related to your Uncle Sam



As to Roth conversions...we've been doing some in the lower bracket (top of 12%) since we will definitely be in 22% after SS. After I start mine (a bit after FRA, spouse will be at 70) we will do only small conversions, to below IRMAA tier, and will supplement my SS and pension with small draws of my (as yet untransfered 401k to) rollover IRA to slightly reduce it. We won't be able to fully convert the IRA's but be able to make a dent in them; any supplemental needs will be from them rather than the taxable and Roths. This allows for the surviving spouse, whenever that happens, to have tax free Roths, low-tax taxable accounts, and somewhat smaller IRAs that would be needed to pull from, in addition to the pension- - - the result is likely to be in the first IRMAA tier for the remaining lifespan but still lower tax bracket (22/24%).

 

[isisdave]

Use your most recent tax program to do simulations. We have about $55k from SS and $16k from a rental property, and I used most of my RMD for QCDs. I found we could convert $21k without paying any federal tax at all, this year, due to the $27k standard deduction. DW just turned 71, so her RMDs begin next year.

Don't forget to include state taxes in your investigation.