There's been a lot of focus this year on the decisions you face when considering a Roth conversion. One area that gets short shrift is the future impact on Social Security benefits taxation.
This is important to consider, especially if you can reduce your non-Social Security income significantly by drawing your income requirement from a Roth account instead of a taxable account.
It may seem like this is an insurmountable position to be in. After all, you may need an income of $60,000 just to get by.
Imagine, though, what would happen if you were able to take a large portion of that $60,000 from a tax-free source -- your Roth IRA. In that case, you might be able to get by without having to pay tax on your Social Security benefits (or a portion of them).
- Let's back up and look at the facts. If your net adjusted gross income (not including Form 1040 line 20b) plus half of your Social Security benefit is less than $32,000 -- or $25,000 for singles and heads of household -- then none of your Social Security benefit is taxed.
- If the amount described above is greater than $32,000 but not more than $44,000 -- or between $25,000 and $34,000 for singles -- only 50% of your Social Security Benefit will be taxed.
- If that same figure is above $44,000 -- or $34,000 for singles -- then 85% of your Social Security benefit will be taxed.
Let's say John and Mary's lifestyle requires an income of $60,000 and they have a combined Social Security benefit of $25,000. If they take a total of $35,000 from their IRAs, which has a total balance of $500,000, to make up the difference, adding half of the benefit to the rest of the income (that's $12,500 plus $35,000), gets $47,500. Since this is greater than $44,000, that means 85% of the benefits are taxed.