Roth Conversion and Social Security Taxation

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yougotitdude
Posts: 22
Joined: Fri Sep 15, 2017 12:40 pm

Roth Conversion and Social Security Taxation

Post by yougotitdude » Tue Aug 07, 2018 1:39 pm

Hey all,

I found this and it's been quite helpful but still want to make sure I have a good understanding:

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

It gives a chart and says this:

"Married taxpayers:

If you are a married couple and receive $40,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $12,000.
For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $56,941, which makes the maximum $34,000 taxable.
The table below assumes that you take the standard deduction ($26,600 for a married couple over 65)."

So let's say a couple has about $38,700 in social security income and want to convert the maximum to a Roth while staying in the 12% marginal bracket. If we assume they could take the standard deduction, so if they are married filing jointly, the could have the $77,400+$24,000 =$101,400 and still be in the 12% tax bracket, right? So $101,400-$38,700 (social security) = %62,700 in "other income" or Roth conversions to be taxed at 12%? Thanks so much!

Dottie57
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Joined: Thu May 19, 2016 5:43 pm

Re: Roth Conversion and Social Security Taxation

Post by Dottie57 » Tue Aug 07, 2018 2:24 pm

yougotitdude wrote:
Tue Aug 07, 2018 1:39 pm
Hey all,

I found this and it's been quite helpful but still want to make sure I have a good understanding:

https://www.bogleheads.org/wiki/Taxatio ... y_benefits

It gives a chart and says this:

"Married taxpayers:

If you are a married couple and receive $40,000 in Social Security benefits:

None of your benefits are taxable if your other income is less than $12,000.
For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $56,941, which makes the maximum $34,000 taxable.
The table below assumes that you take the standard deduction ($26,600 for a married couple over 65)."

So let's say a couple has about $38,700 in social security income and want to convert the maximum to a Roth while staying in the 12% marginal bracket. If we assume they could take the standard deduction, so if they are married filing jointly, the could have the $77,400+$24,000 =$101,400 and still be in the 12% tax bracket, right? So $101,400-$38,700 (social security) = %62,700 in "other income" or Roth conversions to be taxed at 12%? Thanks so much!
Try Taxcaster. They have an iPad app, maybe one for Android and a web page. It. Is really just for estimates. Not highly. Detailed. It will give a decent approximation of taxes.

I like the app much better than web.

pshonore
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Re: Roth Conversion and Social Security Taxation

Post by pshonore » Tue Aug 07, 2018 2:29 pm


cas
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Re: Roth Conversion and Social Security Taxation

Post by cas » Tue Aug 07, 2018 2:31 pm

yougotitdude wrote:
Tue Aug 07, 2018 1:39 pm
So let's say a couple has about $38,700 in social security income and want to convert the maximum to a Roth while staying in the 12% marginal bracket. If we assume they could take the standard deduction, so if they are married filing jointly, the could have the $77,400+$24,000 =$101,400 and still be in the 12% tax bracket, right? So $101,400-$38,700 (social security) = %62,700 in "other income" or Roth conversions to be taxed at 12%? Thanks so much!
Unfortunately, the answer to the question I highlighted is almost certainly "no."

The (main) issue is that the marginal rate and tax bracket are often not the same. One common cause of high marginal rates (much higher than the nominal tax bracket rate) is the phase-in of social security taxation.

(Aside from that main issue, I think there are also a couple of lesser issues in your math:
-if both member of the couple are over 65, then standard deduction for 2018 is $26,600, rather than $24,000
-(let's assume you knew that about the standard deduction, but are both under 65, so your standard deduction really is $24,000). If you have $38,700 in SS income, the maximum that will ever become taxable income is 85% of that, or $32,895. So it would be $101,400 - $32,895, rather than $101,400 - $38,700)

Back to the main issue...

If you look at the rightmost column ("Marginal Tax Rate") of the table under the wiki example you quote (and also the marginal tax rate graph underneath that table), it looks like a large portion of the Roth conversion in your example would be taxed at a 22.2% marginal rate, even though the taxable income is nominally in the 12% bracket. (Because for every $1 of Roth conversion money you add, there is also a large range where the $1 in Roth conversion willl trigger $0.85 in social security income to phase in to be taxable. $1.85 x 12% nominal tax bracket = 22.2 cents tax per $1 Roth conversion amount added = 22.2% marginal tax rate on that $1 in Roth conversion)

(Well, that was a lot of numbers. I suspect that I messed up at least one of them somewhere along the way. Let the reader beware.)
Last edited by cas on Tue Aug 07, 2018 2:36 pm, edited 1 time in total.

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Peter Foley
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Re: Roth Conversion and Social Security Taxation

Post by Peter Foley » Tue Aug 07, 2018 2:35 pm

SS Benefits are taxed based on ones Modified Adjusted Gross Income, not one's taxable income. If you do a substantial Roth conversion it is likely that 85% of your SS Benefits would be taxable. The taxation of SS Benefits creates marginal tax rates different from the standard 10%, 12%, 22%, etc. There are a number of chart available that illustrate this.

Edit: Cas and I were writing at the same time. Well done Cas, a more thorough and illustrative explanation than mine! :happy

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FiveK
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Re: Roth Conversion and Social Security Taxation

Post by FiveK » Tue Aug 07, 2018 4:31 pm

yougotitdude wrote:
Tue Aug 07, 2018 1:39 pm
So let's say a couple has about $38,700 in social security income and want to convert the maximum to a Roth while staying in the 12% marginal bracket. If we assume they could take the standard deduction, so if they are married filing jointly, the could have the $77,400+$24,000 =$101,400 and still be in the 12% tax bracket, right? So $101,400-$38,700 (social security) = %62,700 in "other income" or Roth conversions to be taxed at 12%? Thanks so much!
Apps and web-based programs do what they do, but if you don't mind spreadsheets then the one used to generate the charts in that wiki article may serve you better.

Assuming the couple are both 65 or older, the various marginal and the cumulative tax rates for the tIRA withdrawals:
Image

Footnote 7 in the wiki article will take you to a website from which you may download the spreadsheet. The personal finance toolbox spreadsheet link will do likewise.

This pretty much reflects cas's summary. Between that post and this, it should cover things for those who prefer either words or pictures.

yougotitdude
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Joined: Fri Sep 15, 2017 12:40 pm

Re: Roth Conversion and Social Security Taxation

Post by yougotitdude » Fri Aug 10, 2018 2:17 pm

thanks all for everything! I really liked the taxcaster especially! ;)

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