I still plan to retire about a year before I start collecting social security and convert all of my 401(k) to my Roth. I will have to pay substantial taxes at that time out of my taxable accounts but will then be able to withdraw from the Roth while collecting social security without taxation of SS benefits. Taxation of SS benefits is extremely onerous.
Short response: Income taxes on social security would confiscate at most 30% of those benefits and you'd have to have annual taxable income over $300,000 to pay that much. Please run the numbers before converting to a Roth IRA.
Long response:
I have my doubts that the conversion to a Roth IRA will benefit you, except maybe in the case John mentions where you pay the tax on the conversion from other funds. Even then, the analysis should include the alternative possibility that you do not convert and, instead, keep the money that would have gone for income taxes working for you in a taxable account. Even if you plan to convert, spreading the conversion out over a few years seems an attractive alternative, rather than doing it all at once, so that IRS will tax the income later and in lower brackets. Every time I run the numbers for my own case the results tell me not to convert any significant amount of money to a Roth. This accords with my preference: Pay no tax before you have to.
Are the taxes on SS benefits really onerous? As I understand it, the maximum amount of social security benefits subject to income taxes is 85% of those benefits, and the maximum federal income tax rate is 35%. This means that the maximum possible federal income tax on your social security benefits would be about 30% of those benefits (not 85% of them as someone mistakenly thought) although you might pay a little more by encountering some phase-outs of deductions. If your taxable income is anything less than $300,000 a year, the effective income tax on your social security benefits would be less than 30%. Further, your social security benefits may be only a fraction of your retirement budget -- say one or two fifths. If social security is a large part of your retirement income, maybe three or four fifths of it, you would probably pay little or nothing in income taxes on your SS benefit under present law anyway.
The imposition of income taxes on social security benefits is obnoxious, of course, since we made all our social security "contributions" involuntarily and with after-tax earnings. That is, we have already paid income taxes on the money we put into SS and now some of us have to pay income tax on the same money when we take it out. This burden falls exclusively on a small group of people who were the most successful in providing for their own retirements. The point of this tax, of course, was to introduce something resembling means testing for social security benefits without having to admit it. The government even pretends that the income tax from social security income taxes goes to shore up the social security and medicare programs, when in fact, the government just gives those programs IOU's and spends the money elsewhere.
In the event that your income is so high that you pay the maximum income tax on your social security benefits, the fraction of your income going to that tax will be barely noticeable rather than onerous.
This is not tax advice. The authoritative source of information on these matters is IRS, even though their employees answer taxpayers' questions incorrectly maybe half the time.
He who has lived obscurely and quietly has lived well. [Latin: Bene qui latuit, bene vixit.]
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