Early SS to pay Roth convert taxes?

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hvaclorax
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Early SS to pay Roth convert taxes?

Post by hvaclorax »

Currently age 66, thinking about starting SS at age 69.5 so as to use the extra $20k to help pay for Roth conversions. I will have no after tax money at that point in my Roth conversion plan. Why not? Is my plan better than using tIRA money to pay the taxes?
Thanks, Hvac
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FiveK
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Re: Early SS to pay Roth convert taxes?

Post by FiveK »

Yes, you will in effect be converting taxable money to Roth by using the SS. A six month difference in SS start date won't be all that significant in terms of lifelong benefits.
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JoeRetire
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Re: Early SS to pay Roth convert taxes?

Post by JoeRetire »

hvaclorax wrote: Fri Sep 13, 2019 8:59 am Currently age 66, thinking about starting SS at age 69.5 so as to use the extra $20k to help pay for Roth conversions. I will have no after tax money at that point in my Roth conversion plan. Why not? Is my plan better than using tIRA money to pay the taxes?
Is there a way you can come up with the $20k without taking SS before 70?

You have 4 years to come up with the money.
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rkhusky
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Re: Early SS to pay Roth convert taxes?

Post by rkhusky »

hvaclorax wrote: Fri Sep 13, 2019 8:59 am I will have no after tax money at that point in my Roth conversion plan.
Did you mean "no tax deferred money (i.e. tIRA)"?
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David Jay
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Re: Early SS to pay Roth convert taxes?

Post by David Jay »

hvaclorax wrote: Fri Sep 13, 2019 8:59 amIs my plan better than using tIRA money to pay the taxes?
No.

Run the numbers: 85% of the Social Security benefit will be taxable, so you are saving the taxes on $3000 (what’s your bracket, 22%? That would be $660 in taxes) in exchange for perhaps $1200 (if your PIA is $2700) less SS every year for the remainder of your life.

Withhold the taxes from your tIRA when you convert and take your SS @ 70.
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FiveK
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Re: Early SS to pay Roth convert taxes?

Post by FiveK »

hvaclorax wrote: Fri Sep 13, 2019 8:59 am Currently age 66, thinking about starting SS at age 69.5 so as to use the extra $20k to help pay for Roth conversions. I will have no after tax money at that point in my Roth conversion plan. Why not? Is my plan better than using tIRA money to pay the taxes?
FiveK wrote: Fri Sep 13, 2019 10:37 am Yes
David Jay wrote: Fri Sep 13, 2019 1:17 pm No
The slight difference in answers may stem from interpretations of "...use the extra $20k to help pay...."

hvaclorax, how much tax are you expecting for your Roth conversion the year you are 69.5-70? I.e., is it about $20K or much less or much more...?
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hvaclorax
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Re: Early SS to pay Roth convert taxes?

Post by hvaclorax »

Sorry for the confusion. No after tax money means I will have depleted after tax savings with witch to pay taxes. Taxes are about $60k for just the Roth portion. Agree $20k from SS is only $3k tax free but that’s better than $0. To clarify the question “is it reasonable to start SS 6 months early to get $3k towards my goal?”
Hvac
sawdust60
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Re: Early SS to pay Roth convert taxes?

Post by sawdust60 »

Perhaps do the Roth conversion in 4th quarter. Make estimated tax payment on the following January 15th, using tIRA withdrawal. The tIRA withdrawal could help satisfy the RMD.

Without a more complete analysis of income, savings and withdrawal plans, I don't understand how a recommendation could be made.
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David Jay
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Re: Early SS to pay Roth convert taxes?

Post by David Jay »

hvaclorax wrote: Sun Sep 15, 2019 10:17 am To clarify the question “is it reasonable to start SS 6 months early to get $3k towards my goal?”
No. The SS benefits lost exceed the savings in short order and continue for the remainder of your life.

You have an option, use $20,000 from your tIRA and keep your full SS benefit. Don’t let the tax savings tail wag the financial dog.
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retiredjg
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Re: Early SS to pay Roth convert taxes?

Post by retiredjg »

Remember that having the SS income will reduce the amount you can convert if you are trying to stay under a certain limit (for example an IRMAA limit).

How much do you lose in SS if you start at 69.5 vs 70?

I'd probably skip the finagling just pay the conversion out of the tIRA. That's not hard to do if you consider that Uncle Sam already owns a certain percentage of your tIRA. It's simply a matter giving it to Uncle now or later.
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FiveK
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Re: Early SS to pay Roth convert taxes?

Post by FiveK »

David Jay wrote: Mon Sep 16, 2019 6:53 am
hvaclorax wrote: Sun Sep 15, 2019 10:17 am To clarify the question “is it reasonable to start SS 6 months early to get $3k towards my goal?”
No. The SS benefits lost exceed the savings in short order and continue for the remainder of your life.

You have an option, use $20,000 from your tIRA and keep your full SS benefit. Don’t let the tax savings tail wag the financial dog.
It will take a minimum (i.e., assuming 0% ROI) of 16 years to break even on delaying SS start from age 69.5 to 70.

Assuming a non-zero ROI and accounting for the avoidance of tax drag by getting the extra 6 months SS into Roth instead of taxable only increases the time to break even.

Reading between the lines, it seems hvaclorax will be just fine regardless of which path is taken (because if $60K is the tax bill on only one year's conversion...). There is no "correct" answer except in hindsight, but at the least hvaclorax's idea is reasonable.
sawdust60
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Re: Early SS to pay Roth convert taxes?

Post by sawdust60 »

With 60k tax bill, I would be concerned about IRMAA.
Topic Author
hvaclorax
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Re: Early SS to pay Roth convert taxes?

Post by hvaclorax »

Sawdust60 is correct I will move up in IRMAA costs but not enough to lose the overall value of conversion to Roth. I like idea to pay IRS in January 2020. That kicks the can in the next decade. I disagree 5K, I would be ahead $s until about 80 years old before claiming at 70 beats 69.5. Maybe I will come out ahead. Thanks, you all are Rock Stars.
Hvac
nbseer
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Re: Early SS to pay Roth convert taxes?

Post by nbseer »

This is exactly what I've been doing.. started taking SS at 65, using it to live on and also pay taxes on Roth conversions. Not touching my tIRA yet.. but then again, I'm fortunate to have a pension that I will probably start taking at age 70 .
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FiveK
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Re: Early SS to pay Roth convert taxes?

Post by FiveK »

hvaclorax wrote: Mon Sep 16, 2019 5:02 pm I would be ahead $s until about 80 years old before claiming at 70 beats 69.5.
Using the $2700 PIA guesstimated by David Jay, and a 1953 birthday, using the 'SocialSecurity' tab in the personal finance toolbox spreadsheet gives
Age 69.5: $3634/mo
Age 70: $3748/mo

The extra six months provides 6 * $3634 = $21,804.

$21,804/($3748 - $3634)/12 = 15.9 years

I think that one gets about the same result for other PIAs.

But your actual SS benefits might differ from what that tool calculated.
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Re: Early SS to pay Roth convert taxes?

Post by grabiner »

hvaclorax wrote: Sun Sep 15, 2019 10:17 am Sorry for the confusion. No after tax money means I will have depleted after tax savings with witch to pay taxes. Taxes are about $60k for just the Roth portion. Agree $20k from SS is only $3k tax free but that’s better than $0. To clarify the question “is it reasonable to start SS 6 months early to get $3k towards my goal?”
It doesn't really help. If you delay SS, you will get larger benefits which are only 85% taxable, so you can take the same advantage of the money to make Roth conversions after you start SS.
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Re: Early SS to pay Roth convert taxes?

Post by MathWizard »

I can't think of any way that this costs you less.

Roth conversions are of minimal benefit, much less than delaying SS
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FiveK
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Re: Early SS to pay Roth convert taxes?

Post by FiveK »

MathWizard wrote: Mon Sep 16, 2019 8:50 pm I can't think of any way that this costs you less.
Paying the tax on the conversion with cash on hand effectively moves money from taxable to Roth.

It's not huge, but it is better than paying the tax on the conversion from the traditional amount and ending with less in Roth.
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Re: Early SS to pay Roth convert taxes?

Post by #Cruncher »

FiveK wrote: Mon Sep 16, 2019 6:12 pmThe extra six months provides 6 * $3634 = $21,804.
$21,804/($3748 - $3634)/12 = 15.9 years
I think that one gets about the same result for other PIAs.
The PIA (Primary Insurance Amount) is irrelevant in determining the breakeven years from delaying Social Security from age 69.5 to 70. It depends only on the relative percents of PIA on would get at each age. For example, according to this SSA web page someone born 1943 - 1954 gets 132% of the PIA if benefits start at age 70. The PIA increases 8% points per year after Normal Retirement Age (NRA) for anyone born 1943 or later. Therefore at age 69.5 this person would get 128% of the PIA. These two percents are all that's needed to determine the breakeven.
16 = (128% / 2) / (132% - 128%)

One can also use these two percents to determine the breakeven when future benefits are discounted. Column B represents someone with an NRA of 66 (born 1943 - 1954 and discussed in the previous paragraph) and column C someone with an NRA of 67 (born 1960 or later). For example the following table shows that, when benefits are discounted at 2%, the present values of starting SS at 69.5 or 70 are the same if one lives 19.5 (NRA = 66) or 18.0 (NRA = 67) years past age 70; i.e., to age 89.5 or 88.0.

Code: Select all

Row  Col A               Col B     Col C
  1  Pct PIA at 70    132.000%  124.000%
  2  Pct PIA at 69.5  128.000%  120.000%
  3  Discount            Breakeven Years
  4  0.00%                16.0      15.0
  5  0.50%                16.7      15.6
  6  1.00%                17.5      16.3
  7  1.50%                18.4      17.1
  8  2.00%                19.5      18.0  <===
  9  2.50%                20.7      19.0
 10  3.00%                22.1      20.2
 11  3.50%                23.9      21.6
 12  4.00%                26.0      23.4
Here is the formula in cell B4 that is copied right to column C and down to row 12. It uses the Excel NPER function:
16.0 = NPER($A4, B$1 - B$2, -B$2 / 2, 0, 0)
MathWizard
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Re: Early SS to pay Roth convert taxes?

Post by MathWizard »

FiveK wrote: Mon Sep 16, 2019 9:35 pm
MathWizard wrote: Mon Sep 16, 2019 8:50 pm I can't think of any way that this costs you less.
Paying the tax on the conversion with cash on hand effectively moves money from taxable to Roth.

It's not huge, but it is better than paying the tax on the conversion from the traditional amount and ending with less in Roth.
Yes, I agree, paying the tax from a taxable account makes sense.
But that is not the OP's situation.

The options are pull from tax deferred and use some of that to pay the tax on the conversion, or
take SS early to pay the tax.

Taking SS early means that you will be paying tax on 50 or more likely 85% of the SS benefit.

The reason to convert tax deferred to ROTH is to decrease the amount in tax deferred which decreases RMDs,
but also means you have less taxable income after age 70. Also, ROTH does not count when calculating
how much of the SS benefit gets taxed. With the right numbers, your larger SS benefit may not be taxable at all,
or only 50% of it rather than 85%.
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FiveK
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Re: Early SS to pay Roth convert taxes?

Post by FiveK »

MathWizard wrote: Tue Sep 17, 2019 10:18 am Yes, I agree, paying the tax from a taxable account makes sense.
But that is not the OP's situation.
hvaclorax may be enjoying us trying to decipher the actual situation. ;)

The comment "Taxes are about $60k for just the Roth portion" implies a $255K conversion amount. If hvaclorax is not making a mistake by overconverting, RMDs will ensure 85% of SS benefits will be taxable whenever SS benefits start.
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Re: Early SS to pay Roth convert taxes?

Post by grabiner »

MathWizard wrote: Tue Sep 17, 2019 10:18 am
FiveK wrote: Mon Sep 16, 2019 9:35 pm
MathWizard wrote: Mon Sep 16, 2019 8:50 pm I can't think of any way that this costs you less.
Paying the tax on the conversion with cash on hand effectively moves money from taxable to Roth.

It's not huge, but it is better than paying the tax on the conversion from the traditional amount and ending with less in Roth.
Yes, I agree, paying the tax from a taxable account makes sense.
But that is not the OP's situation.

The options are pull from tax deferred and use some of that to pay the tax on the conversion, or
take SS early to pay the tax.

Taking SS early means that you will be paying tax on 50 or more likely 85% of the SS benefit.

The reason to convert tax deferred to ROTH is to decrease the amount in tax deferred which decreases RMDs,
but also means you have less taxable income after age 70. Also, ROTH does not count when calculating
how much of the SS benefit gets taxed. With the right numbers, your larger SS benefit may not be taxable at all,
or only 50% of it rather than 85%.
This discussion suggests a common misunderstanding. There is not a point at which 50% of your SS is taxable below that point, but if you earn an extra dollar, 85% of your SS becomes taxable. Rather, there is a large range in which every $1 of additional income makes 85 cents of SS taxable, with the maximum taxable amount equal to 85%. (Below that, there is a smaller range in which every $1 of additional income makes 50 cents of SS taxable; while taxable SS is capped at 50% in that range, almost all retirees will reach the top of the range before reaching 50% taxable SS.)

And it is this phase-in which makes Roth conversions attractive. If you convert a traditional IRA to a Roth IRA before taking SS, you pay 12%, 22%, or 24% tax on the conversion. If you wait until after you start SS, and you are in the phase-in of SS taxation, you pay 22.2% tax in the 12% tax bracket, or 40.7% tax in the 22% tax bracket. But it can still be worth converting even after taking SS; if you go way over the top of the phase-in one year and pay 22%, 24%, or even 32% tax, you may avoid paying 40.7% tax in future years by reducing the amount you withdraw from traditional IRAs.
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Re: Early SS to pay Roth convert taxes?

Post by MathWizard »

grabiner wrote: Tue Sep 17, 2019 7:49 pm
MathWizard wrote: Tue Sep 17, 2019 10:18 am
FiveK wrote: Mon Sep 16, 2019 9:35 pm
MathWizard wrote: Mon Sep 16, 2019 8:50 pm I can't think of any way that this costs you less.
Paying the tax on the conversion with cash on hand effectively moves money from taxable to Roth.

It's not huge, but it is better than paying the tax on the conversion from the traditional amount and ending with less in Roth.
Yes, I agree, paying the tax from a taxable account makes sense.
But that is not the OP's situation.

The options are pull from tax deferred and use some of that to pay the tax on the conversion, or
take SS early to pay the tax.

Taking SS early means that you will be paying tax on 50 or more likely 85% of the SS benefit.

The reason to convert tax deferred to ROTH is to decrease the amount in tax deferred which decreases RMDs,
but also means you have less taxable income after age 70. Also, ROTH does not count when calculating
how much of the SS benefit gets taxed. With the right numbers, your larger SS benefit may not be taxable at all,
or only 50% of it rather than 85%.
This discussion suggests a common misunderstanding. There is not a point at which 50% of your SS is taxable below that point, but if you earn an extra dollar, 85% of your SS becomes taxable. Rather, there is a large range in which every $1 of additional income makes 85 cents of SS taxable, with the maximum taxable amount equal to 85%. (Below that, there is a smaller range in which every $1 of additional income makes 50 cents of SS taxable; while taxable SS is capped at 50% in that range, almost all retirees will reach the top of the range before reaching 50% taxable SS.)

And it is this phase-in which makes Roth conversions attractive. If you convert a traditional IRA to a Roth IRA before taking SS, you pay 12%, 22%, or 24% tax on the conversion. If you wait until after you start SS, and you are in the phase-in of SS taxation, you pay 22.2% tax in the 12% tax bracket, or 40.7% tax in the 22% tax bracket. But it can still be worth converting even after taking SS; if you go way over the top of the phase-in one year and pay 22%, 24%, or even 32% tax, you may avoid paying 40.7% tax in future years by reducing the amount you withdraw from traditional IRAs.
Yes, I agree. The amount of SS benefits that are taxable can vary from between 0% and 85% .
Topic Author
hvaclorax
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Re: Early SS to pay Roth convert taxes?

Post by hvaclorax »

Ok yes. I will pay tax on 85% of SS. I will pay IRMAA.
Still I am on course with my plans. I’ll convert to the top of the 24% tax bracket. I don’t need anywhere near $100k annual spending for my living expenses.
The rest goes to Roth. I am looking for my heirs to keep the overall tax burden under control as they will be in high brackets when we both pass. The best benefit of Roth is multi generation planning. Think long term. If I were just thinking about my wife and myself I would do otherwise.
Thanks HVAC.
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hvaclorax
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Re: Early SS to pay Roth convert taxes?

Post by hvaclorax »

One other thing,
As I reread all of the above, I can see that confirmation bias may be my problem. I did go ahead and file for SS at 69yo. Probably advice given would be slightly better. I don’t know when I will die.
Again, thanks for the help. Yes I am surprised how far this thread has gone. I’m in the same category as most, paying too much taxes is not a terrible problem.
Respectfully HVAC
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