Would I Pay Lots of Taxes If, I'm a Senior &?

Question

Both my wife and I are over 75 years old.  Our combined social security benefits are $24,000 or so a year.  We also get about $2,000/year or so in dividend income from investments.  We are very frugal and don't require much money to live off of, as we have no debt.  Each year, we take out about $7,000 (combined) in RMDs from our IRAs.  So, that is about $24K + 2K + $7K = $33,000 or so that we bring in.  We typically don't owe any taxes.

However, a friend has suggested that we convert our IRAs into Roth IRAs for a number of reasons.  However, she said that may affect our taxes temporarily (as we make conversions).  I can see some benefit to doing conversions.  I don't even mind paying taxes on them a few years, supposing we take 3-4 years to convert everything.  However, I'm wondering if I should be worried about paying A LOT of taxes if I convert "too much" at a time and what that figure would be that would be considered "too much" of a conversion?

For example, if I converted $15,000 or $20,000 this year, then would that count as income for me and my wife?  And, would I not only have to pay taxes on the converted amount, but also on my Social Security?  Trying to just understand better before taking action and appreciate all the help I can get.  Thanks so much!

oldcraggyguy · Answer

Check to see if you can convert IRAs if you are over 65. You are swimming in cash by the standards of many, so why even bother us with your TALES OF THE RICH.

Anonymous · Answer

You can bump your IRA distributions quite a bit without owing any additional tax.  I certainly would consider it.

Since you are both over 65, your standard deduction is $27400.  That is your 0% tax bracket and there is quite a bit of room left.

If you were to take $25,000 out of the IRAs in one year, that would make roughly $3500 of your SSA benefits taxable.  After the standard deduction, the tax would be $110 to $310 depending on whether or not the dividends are qualified. If you were to take $20,000 out of the IRAs, your tax bill would still be $0.

Note, the RMDs on the IRAs have two purposes--1) to make the money taxable and 2) to use your life expectancy.  If you increase the size of your distributions without making it taxable, great--just be sure to save enough to live on.Note #2.  If you have children and intend to leave any left over money to them, then yeah, converting $120K to a Roth before you die without paying tax is a cool idea.  Your children are likely to be in a higher tax bracket than you.

Anonymous · Answer

If your tax liability is already zero, what benefit is there to converting to a Roth?

A Hunch · Answer

Do you look 30 or 40 years younger than you are?
Your friend is giving you advice that would make sense for (potentially) someone in their 30 or 40s, but not in their mid-70s.

No need to create this taxable when you currently aren't paying taxes

Wayne Z · Answer

Yes, Roth conversions count as income.

Plus....you would probably trigger some or most of your Social Security to be taxable.

I believe that your friend is wrong.  You aren't paying taxes now at all.  Why change that?Tax advice received from friends, family members and others is normally wrong about 98% of the time and that percentage may be way too low.

Would I Pay Lots of Taxes If, I'm a Senior &?

5 Answers