thanks for the reply!

yeah, I overlooked the fact that SS tax is based on earned
income, not AGI.

here's a more detailed picture:
over the past ten years, she made about $45k/year until
2003. in year 2004 and 2005, she was unemployed for better
part of it and collected some unemployed benefits. her 2004
income was $19,000 and 2005 income was $26,000. Right now,
she's 60 yrs old and is currently employed with a projected
income $40k in 2006. currently she's got about $20k in IRA
account (traditional IRA), also has about $40k in liquid
cash.

I'm trying to help her to max out her retirement funds. any
suggestion on what to do?

Thanks

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iongnu[at]my-deja.com wrote:

- quote -

IRA contributions, withdrawals, and conversions have nothing
to do with social security benefits. You are right that any
traditional IRAs converted to Roth IRAs are taxable in the
year of conversion. This does not, however, increase social
security earnings and does not change the benefits that
otherwise apply.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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<xiongnu[at]my-deja.com> wrote:

- quote -

Only earned income counts for Social Security earnings
history I think you want to look at her marginal tax rates
now on conversion compared to after she retires

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<xiongnu[at]my-deja.com> wrote:

- quote -

SS benefits are determined by earned income so the
conversion income will not help bump up her SS benefits.

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xiongnu[at]my-deja.com wrote:

- quote -

The conversion is income, but not subject to FICA tax,
that's the missing piece.

The way to convert is to review her current bracket and
future bracket. While she's working, you may decide not to
do any conversion, or to convert enough to "top off" her
current bracket. It's a bit of effort to track this, but
worth it in the long run.

JOE

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<xiongnu[at]my-deja.com> wrote:

- quote -

Unfortunately, yes.

Social Security benefits are based not on all income, but
only on income subject to social security. This includes
wages, self employment, tips, bonuses, severance pay, and
certain farm income.

It does not include income from pensions, social security,
IRAs, interest, dividends, capital gains, or any of the
above categories that exceed an annual threshold.

So income from IRAs or IRA conversions do not increase the
social security benefit but might increase the amount of
social security that becomes taxable income the year of
conversion.

__
Art Kamlet ArtKamlet [at] AOL.com Columbus OH K2PZH

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- quote -

Social Security benefits are based on WAGES on which Social
Security tax was paid -- not on total income. A Roth
conversion will not increase your mother's Social Security
benefits.

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<xiongnu[at]my-deja.com> wrote:

- quote -

Social Security benefits are based on salaried income, not
investment income or IRA withdrawals, so the conversion will
not affect social security. It will, however, affect her
taxable income for the year, and probably put her in a
higher (probably much higher) bracket if you do it all at
once. I am doing the same thing--converting traditional IRA
to Roth, but doing it gradually over several years,
converting just enough each year to keep me in a relatively
low tax bracket. It does have the affect of making my
social security benefits (which I am now collecting)
taxable.

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xiongnu[at]my-deja.com wrote:

- quote -

Yep, you've sure got the (bull by the horns) or something
like that!

What needs to be done in cases like this is to make a
forward looking five year comparison of the tax implications
of both (or several) courses of action. Then apply present
value factors to the respective cash flows.

ChEAr$,
Harlan Lunsford, EA n LA

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xiongnu[at]my-deja.com posted:

- quote -

Well, you're definitely missing something: Social Security
benefits are tied to earnings on which SS tax was paid. But
a conversion of a traditional IRA to Roth IRA, while
creating taxable income, does not entail any SS taxes (since
it's not _earnings_) -- and therefore will have no effect on
her SS benefits.

Lacking specific income data, accurate analysis is
impossible, but the general rule is that SS earnings have
maxed out at different levels over the years, as taxable
wages were increased to match inflation. But the SS
benefits are keyed to having paid the maximum SS tax for the
years used to calculate -- and that's usually 40 "quarters"
(10 years) of highest wages _on which SS taxes were paid_.

In any event, the taxes on traditional IRA distributions
which are used in a Conversion to a Roth IRA, do not count
in this equation ... so there will simply be an increase in
taxes paid during the conversion year(s).

Now, the general theory is that one takes distributions from
a _traditional IRA during retirement, when overall income is
lower -- and therefore the actual taxes paid are at a lower
rate than would have been assessed during peak employment
years.

Should someone have excellent investments and high pension
income which would combine with IRA distributions, so as to
make 85% of SS benefits taxable (as is sometimes the case),
then the Conversion might make sense -- since, as you
observe, Roth distributions are not taxable.

BUT, if your mother is going to be subsisting on a modest
pension plus SS benefits, then periodic distributions from a
traditional IRA would probably entail a _lower_ tax cost
during retirement (and likely wouldn't cause SS benefts to
be taxable at all ... or at least only to a small extent).
Currently, no taxes are assessed on SS until total income
(including 1/2 of SS benefits) reaches $25,000 ($32,000 for
MFJ).

Details of income are vital ingredients in this analysis, so
I hope the general outline above is helpful.

Bill

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My mom has a traditional IRA account and it's traditional
IRA account and she's going to retire in a few years.

Since traditonal IRA is a tax-deferred account and it has to
be taxed when withdrawl. i'm thinking to convert it into
Roth IRA account for her so she can begin withdrawl it
tax-free after retirement. but this would count as her
income in the same year she makes the conversion. that means
extra tax being paid for the coming year. but since Social
security benefits is being distributed according to one's
income level and years of worked. which means that
conversion will actually bump up her monthly SS benefits
after retirement, which is a very good thing. am i thinking
it right? or i missed something here?

thanks

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