Not necessarily.
Hubby should run some numbers for mom, and see if its worth taking a big tax hit one year and cashing out the tIRA and then avoiding the SS breakpoints in the future. (Probably too late for her since she’s 91, but mentioning that here as its something that others could consider. I should have recommended it to my mom, who had income just over the SS breakpoint and was paying a lot of unnecessary taxes each year.)
Unfortunately for her it is too late to convert it. She needs the money, so converting it and taking a big tax hit at her age isn’t worth it, because knowing this woman, she will live to 100 and if she takes a hit now, there may not be any money left by the time she’s 100 and she doesn’t have the cash to pay the taxes a conversion would cost. We had previously looked into this.
My husband didn’t have any Roth’s, he only had a 401k which was rolled to an IRA when he left his company and then we rolled it to a Roth (I think when he was 59), and at his age he does have to wait out the 5 years to take out any of the income, but can take out the original contributions. It reverts back to Jan 1 of the year you convert, so if you convert today, you go back to Jan 1, so technically it is less than 5 years, but still 5 years. Obviously, it’s not relative for people who are younger than 59-1/2 or people who already have Roth’s. But if you don’t have any, then that’s the relevance of the 5 year rule.
One more question -
Has anyone run an analysis as to when the best time to take Social Security really is? I know they often say use your savings first since each month you don’t draw your social security means more monthly social security, but I was looking at this last week in re to my husband who is turning 62 in January. If he waits until he is 66 and 10 months (“his full retirement age”) the monthly difference is 900. He’s not taking it at 62 no matter what, but I was running numbers and by waiting until he’s 66 and 10 months, he foregoes over 100k of social security for that 900/month extra. So, isn’t the breakeven then (let’s use 100k for ease) when he receives the 100k he didn’t get in his first 4 years 10months (58 months) so approximately 100k/900 months so about 10 years, which means he would be about 76 and 10 years before it made it worth having waiting until he was 66 and 10months to take the later social security (not taking into account COL increases, etc) or am I missing something? That also means if he waits until he is 70 when he has to take it, the breakeven is way later. Someone who has been through this please correct me if I’m wrong. Under this scenario that seems like a hell of a long time to wait for the break even and I guess you have to weigh the factor of someone living that long and how badly you need the money. I would hope and assume he would as he is healthy and it’s much better to have the highest SS for whatever the spousal benefit would be later on as well.
I am about 10 years younger and I think we’ve realized it is also best for me to take it as soon as I am eligible since that means it would be a longer period of time that we would receive 2 checks as opposed to waiting even though mine isn’t as much as is his. But I am curious if my above calculations are correct.
Wouldn’t a conversion to Roth make more sense if your tax bracket is lower now compared to later when you would be taking distributions from the account?
I’ll agree to disagree about flat taxes. When our family lived in HK the ‘progressive’ issue was solved with a larger standard deduction, and it solved a bunch of variable income, class warfare issues and advanced equal protection under the law.
Regarding social security:
Benefits decrease 8%/yr below FRA and increase 8%/yr above FRA. You are basically betting on your lifespan as the there is no real overall advantage to take SS between 62-70 with an ‘average’ life expectancy. The ‘break even’ always occurs at the recipient’s average life expectancy. There are some issues that you might consider besides ‘do we need the money today’:
a. If he takes SS before his FRA, SS will claw back payments at a 50% rate if he works, past around $18K. After FRA, no more clawback but 85% of SS is still considered income for tax purposes.
b. Spousal benefits (50% of primary) can be affected by taking SS between 62-FRA. Spousal benefits will never exceed the 50% of the primary FRA benefit. This would only apply if your benefits are lower than the spousal benefit.
c. When he turns 65, he will have to pay for Medicare B, and D+G if needed and he is not covered under a large employer plan (unless the employer plan requires him to have it) . Otherwise he would have to pay a penalty amount which increases each year when he takes it for the remainder of his life. Payments could be deducted from his SS payment , or paid to the government if you have the funds available.
d. You’ll have a much larger inflation adjusted base if he takes it later. This is the kicker for us. Because no other investment income stream , excepting certain government pensions, is inflation adjusted. If he dies before you - a likely scenario given the age difference - your would receive his benefits at the amount he was receiving, unless yours are higher than his. After 25 years of inflation, your seemingly generous income might not be so wonderful
There are a lot of factors, especially for a married couple. Remember that the survivor gets the higher of the two. So, waiting until he is 70 may be a benefit to you. But - it is not all or nothing. He can take at 68 or 69 just to get a portion of delayed retirement credit. The credit increases the benefit by a guaranteed 8% per year plus COLA. Generally, if you do not need the funds, it may make sense to delay since no investment can guarantee you 8% return. On the other hand, if delaying means drawing down an IRA and paying taxes, it may not make sense. There used to be some good SS calculators online. If I can find a link, I will post.
Try this comparison calculator: Social Security Calculator
@ucbalumnus, that makes sense as we’d be paying tax today to convert and avoiding future tax. I’m always at a high rate, but depending upon what happens in Georgia, it could well be the case that future taxes will be higher than they are now. Maybe I need to reevaluate. My tax deferred savings were in a DB plan but have been rolled into a 401k. Could roll them into an IRA to convert. Taxes would be huge if I did it all at once.
@TooOld4School Yes, a flat tax might work under the scenario of higher deductions for lower income earners, but of course then that changes some of the ideas of it really being just a simple flat tax. You would think our elected politicians could figure some of this out! SMH. I wonder what is going to happen come April when all of these people who have been receiving unemployment suddenly realize they owe taxes on it and since they needed the cash, didn’t have anything taken out for taxes. They’ll get that 1099G and have no idea what to do with it in many cases and I’m sure many will just ignore it. It will be yet another cluster. We amended our 2018 return, sent it in April and are still waiting for it to be processed!
Thanks for the SS info also from @momma2018. I will have to check into that. I forgot about the reduction for earnings made. He is basically retired but does some consulting so it’s all self employment at this point. It’s also my second marriage so if he kicks the bucket before me I can also claim after my first husband but I’m pretty sure this one is basically maxed out. The only difference is this one is just about 62 and the other one is not yet 50 but I don’t think the fact that the other one will be paying in more going forward makes up for the fact that this one paid in for many more past years, even though it was obviously less since the threshold was less back then.
What do you mean by spousal benefits? There are only spousal benefits if he dies. They no longer have the automatic spousal benefit even if the spouse didn’t qualify. For instance, my mom receives a spousal benefit from my dad, but I know that has since been phased out sort of how my full retirement age is not the 66 and 10 months like my husbands, it’s older. 
So if that’s what you’re referring to then point b is now moot.
As for medicare, happy to pay that. It will be much cheaper than what we’re paying for our group insurance now. This year we paid more than 2300k just for the 2 of us. It is actually reducing to about $1300 for 2021 because we found a better plan but medicare will still be cheaper for him at least and I can stay on the group. He will most likely get the extra parts but that’s something I will have to look into costwise to see what’s better but I’m sure that will be.
Point d - that’s what I’m thinking. Just taking it at 70. I will then take mine at 62 so we would have the two for a good amount of time although mine won’t be that much, my income is up and down so when I get my annual report it’s so hard to predict what it will be. Most of our retirement funds are in non taxable funds but there are still some to convert as I mentioned above but also other stock funds so it becomes so complicated especially dealing with capital gains that it’s hard to control and not a bad thing to have income. Better than losses. We also max our HSAs every year which is another nice tax deduction and tax free mechanism. Fun stuff. Dealing with getting my last 3 through college and thinking about this stuff at the same time.
Unless you are looking at distributions in the next 4-8 years, you probably will not be able to predict what tax rates will be at distribution time.
It has been somewhat predictable recently that the highest marginal federal income tax rate will rise or fall based on partisan control, but (a) how much it may rise or fall, (b) when each party will have control is not all that predictable in the longer term, and (c) whether a party will fall into its expected pattern in the future is not completely certain.
Historical Highest Marginal Income Tax Rates | Tax Policy Center lists the yearly changes in top marginal federal income tax rate. By president:
Wilson(D): 0->7->15->67->73
Harding(R): 73->58->43.5
Coolidge(R): 43.5->46->25
Hoover(R): 25->24->25->63
FDR(D): 63->79->81.1->88->94
Truman(D): 94->86.45->82.13->84.36->91->92
Eisenhower(R): 92->91
Kennedy(D): 91 (no change)
LBJ(D): 91->77->75.25
Nixon(R): 75.25->77->71.75->70
Ford(R): 70 (no change)
Carter(D): 70 (no change)
Reagan(R): 70->69.13->50->38.5->28
GHWBush(R): 28->31
Clinton(D): 31->39.6
GWBush(R): 39.6->39.1->38.6->35
Obama(D): 35->39.6
Trump(R): 39.6->37
IMO, one of the best SS estimators is free: OpenSocialSecurity.
It accounts for yearly mortality and for spousal benefits. protip: click the additional info tab at the top.
Did you mean $23,000 or $2300 for your medical costs? That seems pretty reasonable to me if it is the latter. My wife is retiring and her costs through her very generous work group policy is around $1800 + deductibles and non-covered items, somewhere around $3.5-4K in total.
Medicare doesn’t cover everything and your will probably want to have a Medigap, so I would check into it for him. Medical care costs are the biggest downside of retiring before 65, unless his employer will cover it, or you can keep him on your group policy.
Please see this SSA site for an explanation of spousal benefit, which is different than the survivor benefit
Oops typo, $2,300/month. So actually about $28k/year. Not reasonable at all.
For the spousal benefit, it isn’t real clear but it seems to imply that when he takes social security, my age at the time is relevant as far as taking it. If that’s the case I wouldn’t be eligible because when he turns 70, I will still be 60. Or is it that once I choose to take it. But even then if I start at 62, at most it’s only 32.5 so mine may be higher. Another wrench in the mix is I will have a small pension. Of course, let’s just hope there is even anything left by then.
Thanks for all this great info.
Ok, actually I think I get it. So for instance if my husband waits until 70, based on today’s numbers the max person gets $3,895/month. If I wait until my full retirement age which is about 67, I would get my social security amount plus 50% of his which using today’s dollars could be about $2k for me and 50% of his so another 1947.50 so $39.47.50/month for me. So when you take my payment plus his of 3895 a couple could collect $7842.50/mo in SS? Is that correct? He’s also divorced and his ex can collect half his benefit too if it’s greater than hers and pretty sure it is if he’s maxed. No wonder social security is running out of money and need a huge overhaul. Even I can see that.
Instead of raising the amount each year for income caps before someone stops contributing, there should be no cap, because once again the wealthiest just stop contributing and they reap the higher benefits anyway. There’s no reason why my husband or ex should have ever stopped contributing just because they made x dollars one year.
I think the max you can get is the FRA for the one with the highest FRA.
@ucbalumnus, completely agree. My sense is that with the hole we’ve blown in our budgets, it is hard to see a responsible government lowering tax rates (but “responsible” is assuming a lot these days).
If the Democrats control Congress, it isn’t hard to see tax rates going up, but by how much is not in the least predictable as you point out. I’d imagine that one of their first acts would be to grant DC and maybe Puerto Rico statehood to reverse the Republican edge in the electoral college. That would give them some latitude to raise taxes as otherwise someone like Joe Manchin becomes the deciding vote and they would be limited in terms of what they could do. If one or both of Perdue and Loeffler win, it is hard to see much happening. Given the uncertainty, it certainly isn’t obvious that a Roth conversion is worth the effort.
Without a conversion, I would have to start my RMDs in 6 years. It is in the early years that I will for sure be in the highest tax brackets as I will still be working and also taking big but probably unneeded draws from the 401k.
You only the higher of your SS or 50% of your husbands, they are not additive. In addition, if you take your SS prior to FRA, then amount will be reduced proportionally (8%/yr) for both the spousal benefit. However, if you take it after FRA (67-70) only your own benefit will be increased, not the 50% spousal benefit.
Social security is designed so those who contribute less over their lifetimes benefit more, and those who contribute more benefit less. Removing the cap, however, is a massive increase in taxes on better off people, and would raise the overall tax burden to 65-70% in many states. The intention of social security - and I say this straight from from a person who was close with the original Michigan Congressman who wrote the bill, was the keep widows and the elderly from starving in the depression. That level of taxation was tried in other places and is punitive, counterproductive and will remove incentives to work. The result will be lower revenues and fewer jobs, and lower long term growth. The shutdowns have been enough of a drain on businesses who need that money for working capital.
@TooOld4School OT John Dingell? How I miss him. He was a great man. Didn’t know him but lucky you that you did.
I assume that is who you were talking about.
I get all of that, but for income earners of six figure incomes, there is no reason why they can’t pay their share of the social security, even if it’s waived for a business. I can understand the hardship of a business having to continue to pay it over the course of a year, as I’m a business owner (however it is a deductible payroll expense) there is really no reason why an employee can’t still pay it even if the business doesn’t. I know plenty of people that are well over the $137,700 threshold that can certainly well afford to pay the 6.2% on their entire income, especially when they will more than likely be paid more than that over the course of their lifetime, even if you don’t include their spouse.
We’re also going to have a real big problem in a few months, possibly extended to August if this CARES bill is ever signed, that employees have to repay the that share of the payroll taxes that have been deferred. Yet another problem where these people think they got free money that won’t be paid back, like unemployment and going to continue to hurt these people who drastically need help yesterday.
For reasons of political uncertainty, I took mine at 62 and H at FRA 66. At the time if I lived to age 85 (reasonable) then it evened out.