SS Benefits Question

[Nords]

Okay, let's see if I have this right: scenario is some years lowest tax rate by feds., a little taxable nonjob earned income, some nontaxable earned income (Munis).
  Should I then start converting some of my IRAs to Roth IRA during years when I have little or less taxable income?  Then in years when I have some earned work income put it into regular IRA for the tax break deduction to lessen taxes on earned work income?  (Assuming the rules don't change.)
I'm on early retirement (taken at age 62) SS because I didn't trust the feds not to raise retirement age further or cut benefits, and figured out that after 35plus years of working for them, I might as well get them before they or I am gone.

Whether the contributions are deductible or non-deductible, the conversions of conventional IRAs are taxed on their basis. So if you don't pay taxes when you make the contribution (deductible) then you'll pay more taxes during the conversion (zero basis). The IRS saw that one coming and slammed the loophole shut. Your state had probably also closed that loophole.

At age 62 you have to decide two big issues in a Roth conversion: (1) Whether your tax bracket will be higher when you start taking RMDs than your tax bracket is now, and (2) How much you'll be paying on the taxation of your SS. Depending on the size of your RMD, you may escape both issues... or neither.

You can minimize the impact by starting IRA withdrawals now instead of waiting to the RMD deadline, but you may not be able to avoid higher tax brackets and SS taxes altogether. If you start withdrawals now you'll also reduce the IRA's ability to continue its tax-free compounding.

If you see your tax bracket jumping when you start taking RMDs, or if you see your SS being taxed when you start taking RMDs, then you can avoid both issues with a conversion to a Roth IRA. Note that you may have to include state/locality taxes in your analysis. Most people spread the conversions out over a few years, convert enough each year to stay below the 25% income tax bracket, and pay the conversion taxes with funds outside the IRA. It's a multi-factor financial analysis with tedious math, so read up on it at Fairmark.com or ask detailed questions at Ed Slott's discussion board. There are CPAs on his board who delight in elucidating the most obscure IRA tax-code issues.

 

[nvtashak]

Thanks for the two info site/board referrals.
I'm in a no-state-county-city income tax place. Figured if I was going to simplify my life in later years, not having to do state income tax paperwork submission annually would be high on the preference list.

 

[Sundance Kid]

Boont,

Why do you say "real estate" (mailbox money) is great for retirement. Isn't the income taxed at your regular tax rate? What benifit are you talking about?

Being the "Slowest," in my class at the Horseshoeing Academy, I would like an explanation of the above quote. I'm curious about the benefit, the original poster speaks of. Not being critical! Just would like to be educated.