SmartAsset and Yahoo Finance LLC may earn commission or revenue through links in the content below.
Curious if a Roth conversion might boost your Social Security benefits? Here’s the reality: while converting to a Roth IRA ramps up your taxable income for that year, it doesn’t affect the way Social Security calculates your benefits. Social Security relies solely on your earned income – not the extra taxable income generated by a Roth conversion. So even though you’ll pay taxes on the conversion, it won’t add any extra credits to your Social Security record. In fact, Roth conversions can add costs in other retirement areas, as well, despite their advantages.
Here are some more things to consider for your retirement planning. You can also use this free tool to match with a financial advisor if you’re interested in professional guidance for retirement planning and more.
A Roth conversion is when you move money from a pre-tax portfolio, like a 401(k) or an IRA, and put it into a Roth IRA. You can only move money from a pre-tax portfolio, not a depository account or a taxed investment account. However, within this restriction, there is no limit to how much money you can convert in a given year.
The advantage to a Roth conversion is that you will receive the full benefits of a Roth IRA. This means your money will grow tax-free and, when you withdraw it, you won’t pay any taxes on those withdrawals. A Roth account is also exempt from RMD rules, and qualified withdrawals do not count toward your taxable income in a given year.
The disadvantage to a Roth conversion is that the entire amount converted counts toward your taxable income for the year. For example, say you earned $75,000 in salary and converted $100,000 to your Roth IRA in the same calendar year. Your total taxable income for that year would be $175,000.
For any Roth conversion, you need to make sure you have the cash on hand to pay the additional income taxes that this conversion will trigger. If you’re over 59.5 years old, you can take the money from your retirement fund. Otherwise, you need the cash on hand from other sources.
This will also affect any other programs that measure your taxable income. For example, your Social Security benefit taxes and Medicare premiums might increase, since both are based on your taxable income. This also could affect some student aid programs, if you have a child in school or are in school yourself, or it might change your eligibility for Medicaid.
In this case, if you convert $50,000 per year you should plan for these fluctuations. A $50,000 increase in your taxable income will significantly increase your income taxes for the year, and will almost certainly affect any income-assessed programs. Unless you are already at the top of the range, for example, your Medicare premiums will definitely go up, and your Social Security benefit taxes too. Make sure you plan for that.
