Minimize tax on IRA to ROTH share transfer while receiving Social Security benefits with no other income to declare.
Disclaimer: This is not intended to be used as Tax advice. It is simply a lovely story for entertainment purposes only.
For anyone without income, retired, and receiving Social Security benefits here's a tactic I plan to use this year to increase the share count in a ROTH by transferring them from the Rollover IRA.
If I have this figured correctly it should result in a transfer of shares to the ROTH with zero to very little tax owed, depending on how it is played.
At this
SSA Webpage they indicate how tax can be assessed on your Social Security benefit if the "combined income" exceeds $25,000.
Combined Income is defined as:
Adjusted Gross Income (value of the shares transferred, and any other income)
+ Nontaxable interest
+1/2 of your Social Security benefits
As an example, let's use $20K as the SS benefit amount received for the year Half of that amount. i.e.: $10K
Subtract that from the $25,000, leaving $15,000
If there is Nontaxable interest, subtract that from the $15,000.
If there is any other income, subtract that as well.
The way I understand it, the remaining number, using the $15K from above is the range left to work in to avoid any SS benefit being taxed.
On the tax form we already know there will be a Standard Deduction allowed. From 2022 let's use the Filing Single deduction of $12,950 for this example.
If my understanding is accurate, the standard deduction is the value of the IRA shares that can be transferred to the ROTH with zero tax when there are no other sources of income to declare.
In this example, if the IRA transfer value is bumped up to $14,950, there would likely be tax on $2000 as income for the year and no tax on the SS benefit. This will be in the 10% tax bracket, so $200 to transfer a few more shares to the ROTH might be worth it.
Go over $15K in this example and an amount equal to the overage from the SS benefit received will be taxed as well. Still in a low bracket, so might be worth it to pack in a few more shares. Use last year's Tax Table and Form 1040 to mock up various scenarios to see how they come out tax-wise.
As expected, worming through the IRS stuff can be convoluted and I'd highly recommend having a tax expert verify this strategy before filing.
For folks with relatively simple tax returns it should be straight-forward to work the numbers. Only, here's the catch, you have to do the transfer before the end of the tax year, and, the IRS won't publish the forms and tax table to calculate the 2023 return until the end of the year. So, leave some wiggle room if you don't like surprises.
Clear as mud, right?
Please feel free to expose any flies in this ointment. Thank you.