Tax Planing Strageties for Coordinating IRA Distributions and Social Security Income

Submitted by Larry Lightfield on Mon, 2017-07-10 19:15

I am looking for books or links to articles that will help me decide the best timing for when to start social security given I have an IRA that is just in excess of $3M. I have read some that cover good tax planning strategies for IRAs in the $250k to $700k range where RMDs are relatively small. Although I wouldn’t need the money at age 62, does it make sense from a tax perspective to start at the earliest age possible (62) rather than waiting until FRA or further delay to age 70? I have “heard” that the breakeven can be as high as age 95-97 if you don’t take it at age 62.

Assistance appreciated. Thanks.
Larry



Submitted by Alan - IRA critic on Mon, 2017-07-10 21:13

Any decision relative to SS benefit claiming depends on your total financial picture including spouse survivor benefits if you are married. With a TIRA of 3mm your RMDs will start at over 100k and if you will have a few years after retirement with limited income, there is a good opportunity to convert part of your 3mm to a Roth IRA. If you converted 1/3, your RMDs would be reduced by 1/3. Compared to your IRA RMDs your SS benefit is considerably smaller, but if you delay claiming until 70 it gives you more years to convert whatever amount you choose to at a lower tax rate. If you start SS benefits early you will be able to convert less before entering higher brackets. So SS should not be considered separately from these other considerations. Of course, if your life expectancy is limited due to health problems, then you might start benefits earlier particularly if you are single. I am not aware of a comprehensive planning source that includes all the variables that should be included in developing a total financial plan of which SS claiming is only a portion.

Submitted by Larry Lightfield on Mon, 2017-07-10 22:04

Thanks Alan.  I am single and in good health.  I retired 1 year ago at age 60.  I plan to do some Roth conversions starting in 2017 and continue over the next 10 years leading up to age 70 when RMDs are required as you suggest to lower my overall TIRA balance. So many variables and assumptions to be made that make this analysis complex.  I will take a stab at this on my own if I get no other responses or tools suggested.

Submitted by Alan - IRA critic on Mon, 2017-07-10 22:48

Yes, you have some time to research this further, but must do your 2017 conversion before year end. If you overshoot you can recharacterize some of that conversion. If you started SS benefits before 70, it would reduce your conversion space once SS benefits started. The basic break even on delay of SS benefits till 70 is around age 80.5, but if you factor in earnings on the benefits you could taken it increases the break even age, for example with a 6% return the break even goes to around 90. Of course, if you got a 6% return you would apply that to your IRA accounts as well and that would increase your RMDs. Nothing says you have to delay all the way to 70, but I certainly would not start before your FRA (66 and 2 months). SS does have a COLA and you do get the benefit of all the COLAs even when you delay claiming. Finally another advantage is that 15% of your SS benefit is not taxable at the worst.

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