Curious if a Roth conversion might boost your Social Security benefits? Here’s the reality: while converting to a Roth IRA ramps up your taxable income for that year, it doesn’t affect the way Social Security calculates your benefits. Social Security relies solely on your earned income - not the extra taxable income generated by a Roth conversion. So even though you’ll pay taxes on the conversion, it won’t add any extra credits to your Social Security record. In fact, Roth conversions can add costs in other retirement areas, as well, despite their advantages.
Here are some more things to consider for your retirement planning. You can also use this free tool to match with a financial advisor if you’re interested in professional guidance for retirement planning and more.
Roth Conversions and Taxable Income
A Roth conversion is when you move money from a pre-tax portfolio, like a 401(k) or an IRA, and put it into a Roth IRA. You can only move money from a pre-tax portfolio, not a depository account or a taxed investment account. However, within this restriction, there is no limit to how much money you can convert in a given year.
The advantage to a Roth conversion is that you will receive the full benefits of a Roth IRA. This means your money will grow tax-free and, when you withdraw it, you won't pay any taxes on those withdrawals. A Roth account is also exempt from RMD rules, and qualified withdrawals do not count toward your taxable income in a given year.
The disadvantage to a Roth conversion is that the entire amount converted counts toward your taxable income for the year. For example, say you earned $75,000 in salary and converted $100,000 to your Roth IRA in the same calendar year. Your total taxable income for that year would be $175,000.
For any Roth conversion, you need to make sure you have the cash on hand to pay the additional income taxes that this conversion will trigger. If you're over 59.5 years old, you can take the money from your retirement fund. Otherwise, you need the cash on hand from other sources.
This will also affect any other programs that measure your taxable income. For example, your Social Security benefit taxes and Medicare premiums might increase, since both are based on your taxable income. This also could affect some student aid programs, if you have a child in school or are in school yourself, or it might change your eligibility for Medicaid.
In this case, if you convert $50,000 per year you should plan for these fluctuations. A $50,000 increase in your taxable income will significantly increase your income taxes for the year, and will almost certainly affect any income-assessed programs. Unless you are already at the top of the range, for example, your Medicare premiums will definitely go up, and your Social Security benefit taxes too. Make sure you plan for that.
Any income-related fluctuations will be temporary, since conversion taxes only apply to the year in which you made the conversion. In our case above, for example, the following year your income would be $75,000 again. However it's important to prepare for the full impact of spiking your taxable income, even if just temporarily.
A financial advisor can help you navigate taxes and execute an appropriate strategy.
Social Security Credits
Social Security benefits are based on a credit system. During your working life, you receive credits from the Social Security Agency for all income earned each year. The SSA tracks these on an annual basis. That is, you receive credits for all earned income in 2024, then a separate set of credits for all earned income in 2025, and so on.
You receive credits up to the maximum earnings that are eligible for Social Security taxes. Any income above this level does not generate additional credits. In 2025, this maximum is $176,100.
Your Social Security benefits in retirement are based on these credits earned during your working life. When you retire, the Social Security Agency averages the credits you earned during your 35 highest-earning years. Your benefits are then calculated based on this average.
Earned Income vs. Taxable Income
As noted above, there is a critical difference between the income associated with Roth conversions and Social Security credits.
Roth conversions increase your taxable income for a given year. This is defined as the amount of income potentially eligible for federal, state and local taxes, regardless of the source. Note that it doesn't necessarily mean that amount of income on which you do pay taxes, given deductions, exclusions and other exemptions. It's just the amount which could be eligible for taxation.
Earned income, on the other hand, is money that you receive for work. There are a few statutory examples of earned income as well, for example strike benefits or disability pay. In general, this means money received as payment for a job, earnings from self-employment, and profits from running a business. Most significantly, it does not include money you receive from investments or other portfolios.
Earned income is, in almost all cases, taxable income. However, not all taxable income is earned income. This is where the distinction comes in here. A Roth conversion uses money taken from an investment portfolio. Although it applies to your taxable income for the year, it is not considered earned income. As a result, a Roth conversion will not affect your potential Social Security benefits, no matter how much money you move.
Consider speaking with a financial advisor about your financial goals.
The Bottom Line
Roth conversions cannot increase your Social Security benefits. A Roth conversion increases your taxable income, while Social Security credits are assessed based on your earned income. While Roth conversions can increase the taxes you pay on benefits if you make a conversion in retirement, they cannot increase your benefits themselves.
More Tips
- Just because a Roth conversion can't increase your Social Security benefits, that doesn't mean it can't be done. In fact, here are four tips on how you can plan to boost your benefits in retirement.
- Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
- Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
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