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How Roth Conversions Affect Social Security
A Roth conversion does not directly tax Social Security. The issue is that conversion income can increase the formula used to determine how much of a client’s Social Security benefit becomes taxable.
The Rule
Social Security uses “combined income”
For this purpose, combined income is generally adjusted gross income plus nontaxable interest plus one-half of Social Security benefits. Once combined income crosses the applicable thresholds, part of the Social Security benefit becomes taxable.
| Filing status | Lower threshold | Upper threshold | Potential result |
|---|---|---|---|
| Single | $25,000 | $34,000 | Up to 50% taxable above the first threshold; up to 85% taxable above the second threshold. |
| Married filing jointly | $32,000 | $44,000 | Up to 50% taxable above the first threshold; up to 85% taxable above the second threshold. |
Why Roth Conversions Matter
The “tax torpedo” effect
When a Roth conversion is added to income, it may be taxed as ordinary income and also cause more Social Security to become taxable. That means the effective tax cost of the conversion can be higher than the stated federal bracket.
The planning opportunity: converting before Social Security begins, or controlling conversion size after Social Security begins, can reduce this hidden marginal tax effect.
Example
$40,000 conversion while Social Security is already being received
Assume a married couple has $52,000 of annual Social Security benefits and $62,000 of other income. If they add a $40,000 Roth conversion, the conversion may cause up to $34,000 of additional Social Security benefits to become taxable. In a 22% bracket, the taxable-income increase could be closer to $74,000 than $40,000, making the effective tax cost much higher than 22%.
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