The Roth Perk That May Surprise You

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).

THE FACTS

  • 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.

EXAMPLE

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.

If you liked this article you might like

Law Must Be With Google in Java Dispute

When to File for Social Security Benefits

When to File for Social Security Benefits

New Rules of Charity From Your IRA

Delay Social Security, Increase Your Benefits