❓ Are you thinking about doing a Roth conversion, but are receiving Social Security? Here are some tax implications you should know and understand.
Lots of folks are considering doing Roth conversions lately, as the tax climate is favorable for converting. However, if you’re receiving Social Security during the year that you do a Roth conversion, it pays to understand the tax implications of adding more income.
Regarding Deb’s income, she is receiving roughly $18,000 in Social Security benefits, and the inherited IRA generates a required distribution of approximately $4,200 a year. Other taxable items include interest and dividends, totaling approximately $3,600 annually. So her total income is roughly $25,800.If we consider only the above income items, Deb is squarely within the 0% income tax bracket for 2021 , and there is approximately $6,400 before she would have any income tax at all.
Any conversion above that amount begins to impact the taxation of Social Security benefits for Deb. Since Social Security is gradually taxed as your other income increases, we first considered the 50% income inclusion level. As all other income increases, her Social Security benefit begins to be taxable, so the numbers aren’t as straightforward at this point. Adding another $5,500 brings Deb up to the top of the 10% income tax bracket.
To round out the picture, we then looked at the remainder of the 12% tax bracket. Converting an additional $14,500 would bring Deb to the top of that bracket. Her Social Security benefit would be included at the full 85% taxable rate, and the overall cost of the conversion would be $4,655, 14.73% of the converted amount.
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