Nearly all types of income in retirement can create a potential tax trap for Social Security benefits to be taxed as well. This includes not only work income but distributions from traditional IRA accounts and even passive income such as rental income.
Distributions from a Roth IRA accounts, though, do not count toward income for the purpose of how much of your Social Security benefit gets taxed, assuming that the Roth IRA account has been in place at least five years and you are over the age of 59 1/2.
For those individuals who choose to delay their Social Security benefit until age 70, but retire much earlier, this can create a unique opportunity to convert traditional IRA dollars to Roth IRA dollars during the period of Social Security delay.
With proper tax planning, these Roth IRA conversions may be taxed at lower rates today than they would be in the future, especially if income tax rates go up.
The subsequent Roth IRA distributions to supplement the increased Social Security benefit (by delaying until age 70) may allow a majority of income to be received tax-free.
If there is a period of time between retirement and your subsequent receipt of Social Security benefits several years into the future, you should work with your financial and tax advisor to determine if Roth IRA conversions may be appropriate for you.
If you have any questions please feel free to contact me.
