Tax on Social Security

How using a Roth IRA affects the amount of tax you pay on social security benefits.

If your income is above certain levels you have to pay tax on a portion of your social security benefit. Certain forms of exempt income are included when you determine how much of your social security benefit is taxable. Nontaxable distributions from a Roth IRA won't affect the tax on your social security benefits, however.

Nontaxable Distributions

When Congress decided how much tax people should pay on social security benefits, the general idea was that people with higher incomes should pay tax on a bigger portion of the benefit. It seemed fair (to the lawmakers, at least) to include certain types of nontaxable income for this purpose. So when you determine how much of your social security benefit is taxable you have to include the following items:

Some people use a shorthand description of this rule, saying you have to include "tax-exempt income" when you figure how much of your social security benefit is taxable. You might wonder, then, if tax-exempt distributions from Roth IRAs would affect the calculation.
The answer is no. The only forms of tax-exempt income that affect the tax on your social security benefit are those that are specifically listed in a particular section of the Internal Revenue Code. Distributions from Roth IRAs are not on that list. In fact, many other types of tax-exempt income are not on that list, so there's no reason to think this is an oversight that will be corrected later. In theory it's possible Congress will change this rule, but I don't think that's likely.

This provides another potential advantage for the Roth IRA over the traditional IRA. Withdrawals from a traditional IRA can cause you to pay more tax on your social security benefits, but that's not true for withdrawals from a Roth IRA.

Conversions

You have to report income when you convert a traditional IRA to a Roth IRA, and that income can affect the amount of tax you pay on your social security benefit for the year or years you report the income. If it has this effect, you have to consider this cost when you weigh the your rollover choices.
There's a flip side to this coin. If you don't convert to a Roth IRA, you'll report income when you take distributions from your traditional IRA. That income may increase the portion of your social security benefit that's taxable. As explained above, distributions from a Roth IRA don't affect the tax on your social security benefit. So there's a potential added benefit to a Roth IRA conversion, because it may protect some of your future social security benefits from taxation.

Perspective

These consequences are usually relatively small. They affect you only if your income is within a limited range, because once your income is greater than a certain amount you reach the maximum amount of social security benefit that you have to report. If you're in or close to retirement, it's worth noting these points as you make your decisions about the Roth IRA. But don't be overly influenced by what may turn out to be a small effect.

Nontaxable Distributions

Conversions

Perspective

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