What to Consider About IRA to Roth Conversions

"Hey Mike, everyone says I should do IRA to Roth conversion, but I’m not so sure."

Discover how your Social Security could get in the way of your IRA to Roth conversion goals, among other potential inefficiencies.

Text your questions to 913-363-1234. 

Request Your Wealth Analysis by going to www.retireontime.com 

Episode Transcript

Mike (00:05):
Welcome to How to Retire On Time, a show that answers
your retirement questions. We'rehere to move past that
oversimplified advice and getinto the nitty gritty. As
always, text your questions to(913) 363-1234. Again, (913)
363-1234. And remember, thisshow is just a show.
It's not financial advice, somake sure you do your research.
David, what do we got today?

David (00:27):
Hey, Mike. Everyone says I should do an IRA to Roth
conversion, but I'm not so sure.

Mike (00:34):
Yeah. Well, it's good that you're questioning. Yeah. It's
good to question. Here's theproblem I have with with this
idea.
It's based usually on the ideathat you wanna get the most out
of Social Security. And let'ssay, yeah, well, I might not
live that long. I wanna get themost money out. I paid into
Social Security my whole life. Iwanna get the most money out of
it.
The problem is if you're justlike, well, I don't need it. I'm

(00:55):
still working. I'm still livingmy life. If you take it and you
still work and you earn morethan $21,000 a year, you're
getting penalized. I mean,that's not technically a
penalty.
It's just every $2 more youearn, $1 is deducted from your
benefit.

David (01:07):
Okay.

Mike (01:08):
So it's very inefficient. Also, you need to consider your
tax ramifications. So if youhave income and you don't really
need the Social Security, andyou add it in there, now you're
just paying more in taxes. Isthat really worth it? And then
if you're also wanting to do IRAto Roth conversions, is that
getting in the way?

David (01:26):
Does that count as income when you convert your IRA to a
Roth? Mhmm. Okay.

Mike (01:29):
Yep. It's an income distribution, so income taxes,
that affects your provisionalincome to your Social Security.
It affects your adjusted grossincome, the IRA to Roth
conversions, and so on. Sothere's this ripple effect. When
you file for Social Security, itcould affect your income taxes,
your income tax brackets.
It could affect your long termcapital gains if you're taking
income from long term capitalgains. It could affect the tax

(01:52):
rate of Social Security. Maybeyou're able to do some tax work
beforehand, and then you gotyour Social Security more tax
efficiently. It could affectyour legacy planning. If you
delay Social Security, it'sgonna affect your estate or your
legacy planning if you fileearlier on.
When you file for SocialSecurity, that could also affect
it. If you just randomly take itand reinvest it, it's fine, but

(02:12):
it also might push you up intoIrma and affect your health care
if you're 65 or older. Sothere's all these caveats that
you need to understand if youfile for Social Security. What
else does it affect, and what'sthe break even of that
consequence? For some people,filing early makes complete
sense.

(02:33):
Yeah. That's not to reinvest.

David (02:35):
Alright.

Mike (02:36):
Because why would you take it, Social Security, at a
discount just to put more moneyin there? I mean, I guess
there's an argument for thatbecause you might not need
Social Security. You might aswell just take it. You're not
taking money from your assets,but you've living off a pension.
That's all you really need.
So you might as well just takeit, put it in the market,
because everything in the marketis for legacy planning. Like, I
can see certain arguments, butin those situations, they're

(02:56):
often far and few between.They're the exception to the
rule most people are looking totake income from their assets.
That's what complicates thesituation. Again, the question
is usually based on the ideathat I've paid into Social
Security, so I want the most outof Social Security.
And maybe if I take it earlierat a discount, I can grow those

(03:18):
assets with the assumption thatthe growth of those assets will
then offset the increase of thereturn or the higher benefit
later on. Maybe I end up withmore money. There are certain
situations that may make sense,but oftentimes there's
unintended consequences where itwouldn't make sense. Don't treat
Social Security as an isolatedoptimization objective. Treat it

(03:42):
as a part of the overallmachine.
I don't know much about cars.Okay?

David (03:48):
Alright.

Mike (03:49):
Really don't. But I know enough that if you adjust one
part of the engine or exhaust orsomething else, there's a
benefit to it, and maybe there'sa detriment to it. Sure. Yeah.
Maybe you can adjust a part ofthe car to increase your
horsepower, but the detriment isit's causing more gas or
something like that.
Sure. Again, I don't know muchabout cars. I'm trying to off
the cuff create an analogy here.Mhmm. But do you see the

(04:10):
benefits there in the Dutchman?
Like, there's there's gotta be atrade. Yeah. With Social
Security, there's a trade. If itonly looks like there's upside
potential, and it's just a nobrainer, you're missing
something. That's all the timewe've got for the show today.
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(04:30):
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