Impact of Soc. Security Taxation on TIRA conversion to ROTH

Submitted by Anonymous on Tue, 2009-01-20 19:57

I will be eligible to apply for Soc. Sec. in 2 years & want to convert some of my TIRA to a ROTH — was going to convert small amounts over next few (3-5) yrs (enough to keep myself in lower marginal tax bracket), but in reading — it looks like the amount converted would count toward AGI which would then trigger higher taxes on Social Security when I start collecting in 2 years. Am I right that the converted amount counts in AGI when figuring taxability of Social Security Income?

Thanks,
meb24



Submitted by mk foss on Tue, 2009-01-20 21:39

Yes you are correct, the amount converted to a Roth does increase your AGI to see how much of your social security is taxable.

You still may be better off doing a gradual conversion though. Most people pay tax on 85% of their social security any way; the Roth conversion won’t increase that. If you do a conversion all at once, it could affect your Medicare premiums 2 years later. Medicare has a base monthly premium but high income taxpayers must pay more. The AGI limits for that are available from Social Security.

When you call to start Medicare or Social Security the personnel there can be very helpful in explaining how Social Security is taxed and how Medicare premiums may be increased. It’s best not to call on a Monday, they’re very busy that day.

Submitted by Anonymous (not verified) on Wed, 2009-01-21 02:50

mgtf4cpa,
Thanks for the heads up on the Medicare issue — I just checked and I don’t think I’ll ever have to worry about that (higher premiums) — the MAGI is $170,000 for MFJ; ($85,000 for Single filer)– Pretty sure I won’t reach that amount of income in a single year.

I still have 5 years before Medicare kicks in (actually, I think my previous employer pays for Part B) –but again, I might want to check with the HR Dept. It used to pay Part B at one time, but benefits are constantly changing (decreasing for the most part), and I haven’t really looked into it since I retired and Medicare seemed a long way off.

I will try to get more converted in the next 2 years than I originally planned. Planning to start Social Security payments at 62 and I was shocked to find out that 85% of Social Security could be taxable and the $32,000 threshold is pretty low — who knows maybe it will be raised, but not very likely. I guess I better sit down and figure out my options.

I do have another question: Is it too late to do a conversion for 2008–do I have up until I file my 2008 taxes? Also, since I’m over 59.5 I would not have to wait 5 years to make withdrawals of the converted amount if I needed it before 5 years–only the earnings portion would have the 5 year waiting period — Is that correct?

Thanks

Submitted by mk foss on Wed, 2009-01-21 03:07

It is too late to do a Roth conversion for 2008; the conversion had to be in process at 12/31/08.

It’s not too late to make a Roth contribution for 2008; you have until April 15, 2009. You need earned income of $6,000 to make the maximum contribution if over 50.

Submitted by Anonymous (not verified) on Wed, 2009-01-21 03:34

I have no earned income, but my husband started a little part-time job about 6 months ago & earned a little over $6000 in 2008. He also gets a severance pay from his previous employer with a W2 for about $16000 (but I don’t think that’s considered earned income) — can I/we use the $6000 to set up 2 Roth IRAs with $3,000 in each?

If so, rather than doing the conversions for the next 2 years since he is working part-time & will probably earn $12,000/yr. can we just withdrawal from each of our TIRAs $6000, pay the taxes & put the $6,000 into the ROTH IRA so we would only have one 5-yr waiting period. Also, if we set this Roth IRA up before filing our taxes it will have a 1/2008 start date for the waiting period-is that correct?
Thanks

Submitted by Alan Spross on Wed, 2009-01-21 05:11

The W-2 severance income can also be used to fund a regular Roth contribution, and there is enough for a spousal contribution as well, so you both can contribute 6,000 for 2008 if both over 50. Be sure that your total modified AGI is not too high for these contributions though.

Yes, a 2008 contribution done prior to 4/15 starts the 5 year clock as of 1/1/2008. There are two 5 year periods, one for earnings to become qualified and that will apply in your case. The other one is for conversions to avoid the early withdrawal penalty, and that one no longer applies once you hit 59.5.

You do not need earned income to convert to a Roth. 2009 is the last year that the 100,000 max modified AGI limit applies for conversions. A conversion and a regular contribution can both be done in the same year each using their own separate qualification requirements.

Submitted by Anonymous (not verified) on Wed, 2009-01-21 13:08

alan-oniras: Thanks for your reply.

BTW – I called the W-2 a severance pay for my husband, but it may actually be something different. He took an early retirement (“buyout”– downsizing) 2 years ago, and he will received this $16,500 for 2 more years. He could have taken it as a lump sum $67,000, but for tax purposes (and budgeting!!!) he decided on the 4 year distribution plan–so I’m not really sure this would be considered “earned” income, but it does get reported on a W-2 for tax purposes. Do you still think these are wages and/or considered earned income?

I do know that I don’t need Earned income for a Conversion.

I was only planning on converting about $5,000-$6,000 each H&W (total $10,000-$12,000) per year anyway (these are NOT large accounts), so it seems easier (for record purposes) to just remove it from the TIRA and then deposit it as a contribution (up to Husband’s yearly earnings) to the ROTH. Seems simplier to me, only one 5-year clock to be concerned with — or maybe I’m MISUNDERSTANDING the 5-year waiting period if I needed to get to the “EARNINGS portion” because I thought each conversion started a new 5-yr clock. Hopefully, I won’t need to tap into the earning portion, but who knows.

The only reason I was going to do the small conversions was for TAX DIVERSIFICATION after I realized some of our Social Security (maybe up to 85%) was going to be taxable. I had no idea it could be that much, thought it was only up to 50%. Wanted to use this ROTH Account as a Tax budgeting tool — I hate paying Uncle Sam too much money. I may be spinning my wheels on this because our projected expenses are not really that high (provided we stay in good health) and could probably stay under the income range for 85% tax tier. I will at least get a ROTH started now for 2008 with contributions from husbands earnings. Where might I find out for sure if the $16,500 is considered wages so we could contribute the $6,000 max. for each.

Thanks

Submitted by Alan Spross on Wed, 2009-01-21 20:29

“Compensation” for IRA contributon purposes is defined in Pub 590 on p 8. If the income is on a W-2 it is considered compensation, although any entry in Box 11 must be used to reduce the amount in Box 1. If there is no Box 11 entry, he can use the W-2 income to support regular IRA contributions including a spousal contribution for you.

If you decide to do Roth conversions by indirect rollover from a TIRA of the same amount you could use for regular contributions, be sure the Roth custodian is clear that these are conversions and not regular contributions because conversions must be identified separately on Form 5498 issued by the IRA custodian. Your tax return must also agree with the 5498 and 1099R.

Again, the conversion 5 year clock no longer applies at age 59.5. Prior to 59.5 it is best to use regular contributions rather than conversions if you have a choice to avoid the 5 year conversion clock. After 59.5 it does not make any difference.

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