Potential Advantages of Conversion to a Roth IRA
- Long term income tax avoidance
- Hedge against future increasing income tax rates
- Reduction of income tax on your social security income (see below).
- May serve as your emergency fund
Disadvantage
- Income taxes are paid earlier
IRA Distribution and Social Security
Social Security benefits are included in the taxable income of people with incomes that exceed certain levels. The first thing that you do to determine the tax is to calculate what is referred to as “provisional income.” Essentially, provisional income is a person’s adjusted gross income, plus any interest earnings that are tax-exempt and 50% of the Social Security retirement income.
Since you know the provisional income total, you match it up to two “thresholds” to see how much SSI must be be included as taxable income. The first threshold is $25,000 for an individual and $32,000 for a married couple filing a joint return. Please refer to Publication 915.
If the provisional income is less than the Social Security benefit is not taxed. If the provisional income exceeds the first threshold up to a maximum of the actual Social Security benefits received.
The second threshold is $34,000 for the single taxpayer and $44,000 for a married couple filing jointly. If the provisional income is greater than this second threshold, then 50% of the amount that is between the two thresholds is included as taxable income, plus 85% of any amount that is over the second threshold is included as well. The total amount subject to income taxes can never be greater than the amount of the social security benefit.
Distribution from traditional IRAs and 401(k)s are included in these provisional income totals, and Roth IRAs are not on that list.
EACH YEAR CONGRESS MAKES SOME MODIFICATIONS TO THESE THRESHOLDS AND PERCENTAGES.