Delaying Social Security with Roth conversions can be a powerful strategy to boost your retirement income. By waiting until age 70 to claim Social Security, you can take advantage of an 8% annual increase in benefits. In addition, Roth conversions help reduce your future tax burden and optimize your long-term financial plan. Let’s break down the key points.
Key Takeaways
- Roth conversions reduce future RMDs from traditional IRAs and 401(k)s, helping lower taxable income during retirement.
- Keep conversions small enough to avoid jumping into a higher tax bracket, and plan to have funds available to pay taxes on the conversion.
- Roth IRAs have no RMDs, giving you flexibility in retirement and allowing your wealth to grow tax-free for you and your heirs.
- Beware of higher Medicare premiums due to IRMAA, as increased income from conversions could raise your healthcare costs.
Reducing Future RMDs with Roth Conversions
One major advantage of Roth conversions is their potential to reduce the size of your required minimum distributions (RMDs) later in life. Once you hit age 73 (or 75, depending on legislation), both traditional IRA and 401(k) holders must begin withdrawing RMDs, which are taxable income. The more you convert to a Roth IRA earlier on, the less you’ll be forced to take out and pay taxes on later from these accounts. This can keep your taxable income lower in the future, preserving more of your wealth for other goals like travel, family, or philanthropy.
Stay in a Lower Tax Bracket
When converting funds to a Roth IRA, it’s important to consider your tax bracket. Roth conversions are treated as taxable income for the year you make them, so converting too much at once could push you into a higher tax bracket. The strategy here is to convert smaller amounts each year to stay in a lower tax bracket than you anticipate being in once RMDs kick in. This allows you to optimize your tax situation by paying taxes at a lower rate now, rather than at a potentially higher rate in the future.
And don’t forget: you’ll need to have funds set aside to pay the taxes on your conversions when you file.
No RMDs for Roth Accounts – A Major Win
One of the best perks of a Roth IRA is that it has no RMDs. That means once the money is in your Roth, it can stay there growing tax-free for as long as you want. This gives you complete control over when (and if) you take withdrawals, allowing you to manage your income in retirement more flexibly.
For those looking to leave a legacy, this feature is particularly useful as it allows you to pass on the account with a growing balance intact.
Tax-Efficient for Your Estate
Roth IRAs are not just a tool for optimizing your tax bill in retirement—they can also be incredibly tax-efficient for your estate. If you’re thinking about leaving money to heirs, Roth accounts allow them to inherit the funds without facing income taxes on withdrawals, unlike traditional IRAs.
Additionally, although heirs must deplete inherited Roth accounts within 10 years, they won’t owe taxes on any distributions. This makes Roth IRAs a powerful estate-planning tool, providing your loved ones with more financial flexibility.
Watch Out for IRMAA – Increased Medicare Premiums
One downside to consider: converting large amounts to a Roth IRA can increase your income, potentially triggering higher Medicare premiums due to the Income-Related Monthly Adjustment Amount (IRMAA). Medicare Part B and Part D premiums rise as your modified adjusted gross income (MAGI) increases, so it’s critical to plan your conversions carefully.
Small, gradual conversions can help manage this issue while still allowing you to take advantage of the long-term benefits of Roth IRAs. Keep IRMAA in mind when planning conversions so that you don’t unintentionally raise your healthcare costs in retirement.
For more information on IRMAA, see IRMAA Uncovered: Beware of the Medicare Premium Surcharge!
Using Tools to Optimize Your Roth Conversions
One of the most useful tools I use for navigating Roth conversions is the Roth Conversion Explorer, part of the Boldin Financial Planner. This tool assesses my lifetime financial plan and suggests a specific multi-year Roth conversion strategy designed to optimize my long-term financial outlook.
As a user and an affiliate, I personally recommend Boldin for its comprehensive approach to planning. If you decide to create an account using this link ↗, it helps support my blog, at no additional cost to you.
For more information on Boldin, see Boldin: A Financial Tool That Makes Managing Money Easy.
Conclusion: A Bridge to a Secure Retirement
A Roth conversion strategy can be a smart way to delay Social Security while taking advantage of long-term tax benefits. Reducing future RMDs, staying in a lower tax bracket, and passing on tax-efficient wealth to your heirs all make this approach worth considering. However, be mindful of the impact on Medicare premiums and make sure you have the cash on hand to cover the tax bill for any conversions. Balancing these factors will help you maximize your retirement strategy and set yourself up for a more secure financial future.
By using a combination of Roth conversions and delaying Social Security until 70, you can ensure a larger income stream, a more flexible tax situation, and peace of mind in your later years.
To learn more about Roth IRA withdrawals, see Roth IRAs: What You Need to Know About Withdrawals.
Visit the IRS website to learn more about Roth rollovers ↗ and RMDs ↗.
And remember, it’s always a great idea to chat with your financial or tax advisor to make sure your decisions are right on track and aligned with the latest guidelines and laws.