How Social Security Benefits Can Crowd Our Roth Conversions

John Robinson |
Categories
Roth Conversion
Social Security

By J.R. Robinson, Financial Planner, April 2025

Overview

The interplay between Social Security benefits and Roth IRA conversions is a critical topic for retirement planning. The main concern is whether receiving Social Security benefits could "crowd out" the ability or desirability to perform Roth conversions, due to tax implications and income thresholds. A common recommendation in my financial planning reviews is to encourage clients to use the years prior to claiming Social Security retirement benefits to process the bulk of their Roth Conversions.  For clients with large pre-tax IRAs, this is often done as a series of partial conversions that are used to fill up the lower federal income tax brackets (e.g., 12%, 22%, or 24%).

Key Points from Recent Articles

  • Roth Conversions Increase Taxable Income: When you convert funds from a traditional IRA or 401(k) to a Roth IRA, the amount converted is treated as taxable income in that year[1][2][3]. This can push you into a higher tax bracket and, crucially, increase your "provisional income"-the figure the IRS uses to determine how much of your Social Security benefits are taxable[1][2][3].

  • Social Security Benefit Taxation Thresholds: If your combined income (which includes half your Social Security benefits, your adjusted gross income, and any tax-exempt interest) exceeds certain thresholds, up to 85% of your Social Security benefits can become taxable[1][2]. A significant Roth conversion can easily push you over these thresholds, resulting in a larger portion of your Social Security benefits being taxed[1][2][3].

  • Crowding Out Effect Explained: The "crowding out" occurs because every dollar you convert to a Roth IRA after starting Social Security not only increases your taxable income but can also increase the taxable portion of your Social Security benefits. This creates a compounding tax effect: you pay tax on the conversion and potentially on a greater share of your Social Security benefits[1][2][3].

  • Timing Matters: Many experts suggest that Roth conversions are most tax-efficient before you begin collecting Social Security benefits. Once Social Security starts, large conversions can trigger higher taxes on both the conversion and your benefits, making conversions less attractive or even unaffordable due to the increased tax bill[1][3][4][5].

  • Strategic Planning Recommendations:

    • Consider performing Roth conversions in the years between retirement and the start of Social Security benefits, often called the "gap years," when your income is typically lower and you can control your taxable income more easily[4][5][6].

    • After Social Security begins, smaller or more carefully planned conversions may still be beneficial, but the tax impact must be modeled carefully[1][2][3][4].

    • Withdrawals from Roth IRAs in retirement do not count toward provisional income, so after conversions are complete, future withdrawals will not increase the taxability of Social Security benefits[7][6].

 

Article Highlights

Article/Source

Key Takeaways

Nasdaq/SmartAsset[1]

Roth conversions after starting Social Security can push more of your benefits into the taxable category, especially with large conversions.

Yahoo Finance/SmartAsset[2]

Roth conversions don't increase your Social Security benefit, but can increase the taxability of your benefits if done after benefits start.

Charles Schwab[3]

Roth conversions can increase both your Medicare premiums and the taxes on your Social Security benefits.

Fidelity[7]

Withdrawals from Roth IRAs do not impact the taxation of Social Security benefits, highlighting the advantage of completing conversions before claiming benefits.

Solari Financial[4]

Delaying Social Security and doing Roth conversions beforehand can boost after-tax retirement income.

Wall Street Journal[5]

Even older retirees can benefit from Roth conversions, but careful planning is needed to avoid tax pitfalls.

Conclusion

Social Security benefits can "crowd out" Roth conversion money by increasing the tax cost of conversions once benefits begin. This is due to the way Roth conversions raise provisional income, potentially making a larger portion of Social Security benefits taxable and increasing your overall tax bill[1][2][3]. For optimal tax efficiency, many advisors recommend completing Roth conversions before starting Social Security. After benefits begin, the tax impact of conversions becomes more complex and potentially less favorable, requiring careful analysis and planning[1][3][4][5][6]. 

While my financial planning reviews serve to raise client awareness of potentially beneficial conversion opportunities, there is some tax complexity to optimizing the conversion amounts, and all clients are encouraged to consult with their CPAs or other tax advisors before moving forward with a conversion.  Readers who find this article to be relevant may also wish to read my related piece on the impact of IRMAA and the Net Investment Income Tax (NIIT).

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  1. https://www.nasdaq.com/articles/will-roth-conversion-impact-my-taxes-my-2800-monthly-social-security-benefit         

  2. https://finance.yahoo.com/news/doing-7k-annual-roth-conversions-133028214.html       

  3. https://www.schwab.com/learn/story/why-consider-roth-ira-conversion-and-how-to-do-it         

  4. https://solarifinancial.com/the-benefits-of-delaying-social-security-and-using-roth-conversions-for-tax-efficiency/     

  5. https://www.wsj.com/personal-finance/taxes/roth-ira-conversion-tax-c65a41fd   

  6. https://www.investopedia.com/articles/retirement/08/roth-conversion-2010.asp   

  7. https://www.fidelity.com/learning-center/personal-finance/retirement/reducing-taxes-on-social-security