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Complaining about taxes is not unique to seniors or in my case maybe a super senior, but they are mighty vocal and prolific on the internet. I was curious, how much could a age 65+ couple earn in retirement before actually paying federal income taxes on their money?
I ran a couple of scenarios using AI tools. I was a bit shocked at the results. Here is an example …
I asked what a couple both age 65 + with combined SS benefits of $50,000, who use standard income tax deductions, could have in total taxable income before paying federal income tax (2026).
The answer:
They can have roughly $30,700 in other (non-SS) income before owing any federal tax.
Total combined income (SS + other), including the untaxed portion of SS, would be about $80,700.
If they had tax-free interest income the picture could change because that might change the tax on SS benefit. If they had any amount of Roth income the picture would really change. They could be sitting pretty and totally tax free, but why?
I’ll leave it to the tax experts among us to make sense of this, but it seems seniors might have a better deal than many younger folks.
The maximum Social Security benefit in 2026 for someone who made more than the taxable wage base for at least 35 years and retired at age 70 is an astounding $5,181 monthly or $62,172 annually. Ida May Fuller of Ludlow Vermont received the first Social Security benefit check in 1940. It was $22.54. Feckless politicians of all political parties caused Social Security’s problems. Now, feckless politicians of all political parties need to repair the problems their forbears caused. I don’t mind paying taxes. I wish I paid $1,000,000 annually. What I do mind is the feckless politicians continually changing the rules.
Reading the many comments complaining that Roth accounts should be taxable is pretty bizarre. 90% of all IRA $’s are traditional and 10% are Roth -similarly for 401k’s. During my working years I only had traditional 401k and IRA. The advent of Roth accounts was an opportunity to create accounts that “pay taxes in advance” so seemed very attractive -even though paying the taxes was no fun. For those that think it is unfair then convert your account and pay the unpalatable tax today. What about 529 plans, cash value life insurance, HSA accounts?
The comment that 90% of all IRA $’s are traditional and 10% are Roth just got through my head. Roth accounts became available in 1998 so obviously most Roth account holders are on the younger side and this 10% will grow over time. The support for including Roth distributions in income calculations for SS makes sense as a case of “don’t raise my taxes, raise those of these other people who bought into the tax free promise of Roth accounts.”
Bizarre indeed! Hence my earlier wondering if Roths being taxed in some way isn’t as far fetched as one might have once thought, with commenters on this very thread seeming to support it.
Did you see comments supporting taxing Roth distributions? I didn’t see that at all. Using the earnings on a Roth distribution to determine if a portion of SS is taxable is in no way taxing Roth.
What Randy said: of course it is. It may not be a literal tax directly on distribution from the account, but it is absolutely a way to tap the wealth in those accounts in a way contrary to their tax free structure, intention and “promise.”
Of course it is
The larger issue in this is whether Social Security benefits and Medicare premiums should be means tested, and if so, what is the mechanism by which the means testing is done.
Currently SS and Medicare are means tested, and the mechanisms are the SS benefit tax and IRMAA.
The challenge with a means test is how you efficiently and fairly determine “means”. Most of us would define “means” as some function of income and total wealth. However, for both SS and IRMAA “means” is defined by some sort of income, ie. it excludes other forms of wealth like brokerage balances, and 401K/IRA balances etc.
Brokerage accounts produce taxable interest and dividends, and tax deferred 401k’s have RMD’s which force taxable income at some point and these affect SSA taxability and IRMAA. However, Roth accounts are not required to be withdrawn at all, and when withdrawals do occur, they have no effect on SSA taxability and IRMAA.
That is Roth IRA balances are not included in any means test of SS benefits and Medicare premiums. The question is: is it fair to exclude the means associated with a Roth account while including tax deferred or taxable accounts. The answer is clearly no. The claim that the Roth contributions were already taxed as income and should not have any bearing on SSA taxability and IRMAA is not compelling to me, because the SSA tax and IRMAA not specific taxes on that income.
The simple fact that the SSA taxability and IRMAA avoidance are major drivers of Roth conversions, should also tell you that there is an inherent unfairness in excluding Roth income in means testing of SSA and Medicare.
Right on Adam ‼️. That’s the logic I was talking about.
For reasons already covered by others, I disagree with taxing Roths, including stealth taxation by counting Roth distributions as income for calculating any other tax or surcharge paid to the government. However, I’d be happy to simply pay tax on 100% of the social security benefit and ditch the income calculation. As Marilyn said the ones paying the tax don’t need the safety net.
Roth IRA’s are one of the best vehicles yet developed to reduce seniors’ reliance on the archaic, politically poisoned Social Security Program…..at least for those who opted to participate. To entangle Roth IRAs with the lamentable state of the Social Security mess is ridiculous.
With the advent of the Tax Payer Relief Act of 1997, a rare “ win- win” occurred where the Federal Government received accelerated tax payments and tax payers gained long term tax relief.
Behold: people gained more incentive to save for retirement and self reliance / independence from government in retirement. Isn’t that what we as a nation want to encourage?
The insatiable federal appetite for more accelerated tax revenue resulted in further adjustments after 1997 to Roth resulting in Roth conversions and “ back door” contributions.
Those who opted to contribute to Roths are virtually universally glad they did and many wish they participated more/ earlier. Even non- working spouses who contributed the maximum amount allowed each year since Roth inception in January, 1998 through January, 2026 could have approximately $695,000 in tax free funds if invested in a Total U.S. Market Index fund with dividend reinvestment. Talk about a spousal benefit!
The focus should be on shrinking Social Security by encouraging self reliance, not breaking even more promises outside the program to have it muddle along in its current decrepit state.
I’d rather see my future S.S. Benefits slashed or eliminated vs poison the wealth creating, self empowering and yes, tax revenue accelerating “ win- win” engine that the Roth IRA is.
I will be as polite as possible about your assessment of SS and IRAs. Nonsense.
SS is critical for the majority of working Americans. Your statements like “The focus should be on shrinking Social Security by encouraging self reliance” is right out of the Project 2025 playbook.
Nobody gets to 65 on self reliance. Most of us relied on employer benefits, sometimes funded indirectly by taxpayers in the public sector or students in academia.
Think of all the tax-advantaged programs now used mostly by the middle and upper middle class many of whom still struggle to save for all the things necessary. What more encouragement do they need? The threat of being destitute at 65?
What about the lower 50% income wise, the less knowledgeable individuals?
What people should do, will do and can do are very different things. Your view ignores human nature and the collective insurance power of SS and that SS is far more than retirement income for the worker.
Your position IMO is as off base as those who claim they could save and invest the SS taxes on their own and under all circumstances come out better than paying SS taxes. That too is nonsense in the real world.
I urge you to look at the actual accumulated savings of 55-64 year olds. The accumulated amounts are insufficient to live in retirement with SS, let alone without it.
Dick,
I’ll politely reel you back into the conversation at hand from your self-imposed, tangential echo chamber on this topic.
At no time did I indicate that those in need of Social Security should not continue to receive it now or in the future. That notion originated in your response.
I’ll be more explicit to help you along.
The shrinking of Social Security should happen in the upper income thresholds which based on your rather detailed disclosures of your situation, includes you and while I would never disclose my situation in detail, includes me as well. The fact that you or I and anyone in our economic demographic or above collects or is about to collect S.S. is the nonsense. If there is going to be a hit to benefits, it needs to start at the top. My closing statement specifically stated as much if you read that far.
With that basis (re)set; if you re-read my comments, it is directed at the notion that Roth IRA’s should not be used to help fix or perpetuate the current S.S. mess. I gather you are not a participant in the Roth IRA universe. If that is the case then frankly you are not in a position to have personally experienced how much progress toward financial independence has been and continues to be facilitated for so many with Roth IRA’s as a powerful element in their portfolios.
I’ll skip over the politically charged rhetoric in your response and only address the items that are relevant to my original post.
· I don’t see employer benefits (be they public or private) germane to self-reliance in this context. Benefits are part of compensation that we all work for and consider when opting to accept or reject employment as we work toward financial security and ideally true independence in retirement. So, this is out of context, no comment necessary.
I’ll skip further down a few paragraphs as they are solely within your own echo chamber. I made my point above that the shrinking of Social Security needs to be at the upper end of the economic strata not the lower or even mid. Enough said.
· Regarding your paragraph on the ability to achieve greater results by investing a dollar vs paying S.S. tax. From a sheer return perspective, I’ll bet on the U.S. equity market over time vs S.S. It’s unfortunate that the S.S. program itself does not have a market-based component to aid in long term liquidity. That said, before you place any more words in my mouth from your echo chamber, I believe strongly that virtually everyone should have to pay into the system to support those who NEED Social Security. I’ll also add that I’ll continue to side with the Warren Buffets of the world who have faith in the U.S. equity markets to create true wealth and financial independence.
In closing, the solution to the Social Security morass need not be to solely address the revenue/tax side of the equation. There needs to be a reduction in spend and it needs to start at the top with people like you and me. Roth IRA’s are one vehicle to lift people out of the lower and indeed mid economic levels; some percentage of whom could be (and are) in a position to live entirely without S.S. one day. This is a worthy goal for society and the individual. Back to my original point in all this: Why sully a solid, successful, win-win program such as Roth IRAs to fund the failings of a runaway Social Security program …and to add…that is so poorly administrated that it pays benefits to independently wealthy individuals.
On the reduction in spend side, I’d suggest ending the benefit for spouses like RQ’s who have made the lifestyle decision not to participate in the workforce and consequently have made no contribution to the trust fund.
Oh Marilyn, I apologize for starting your morning like this but it gets so much worse.
Imagine a non- working spouse who was astute enough back in 1998 in their 30’s to open and contribute to a Roth account and contribute each year since. They have amassed approaching 3/4 of a million dollars in that account by trusting that the U.S. Equity Market is a wealth building engine. Presently, they are still a few years from collecting Social Security. By the time their spousal S.S. payments commence who knows, it may be approaching a million dollars in the account. Thanks to the largess of the Social Security program, that spouse will be able to leave much more invested for longer tax free in the Roth AND probably pass some down to the next generation who can leave it invested tax free for 10 years.
All very wonderful for the spouse and their family.
You can’t make this stuff up. Only a government program mired in the past could operate this way.
The good news though Marilyn, not everyone lined up on the receiving end of this largess feels entitled to it nor wants others taxed more to sustain it.
I leave you on that positive note. Enjoy your morning.
I can go you one better. I know a woman who has a $4M divorce settlement and who will also qualify for the ex wife spousal benefit.
What about children disabled from birth, why not them too they never paid taxes. How about ex-spouses concurrently with current spouse. A two for one deal. Or may spouses who were married only a few months before collecting benefits.
Disabled children: all info on disabled taxpayers and dependents is collected on the 1040. Disabled children can easily be identified and exempted under the safety net provision. Same for spousal caregivers of the children.
Presence of child under 6: credit given to caregiving spouse toward SS benefits. Again info is on the 1040..
Ex spouses and spouses married only a few months: same treatment as unemployed current spouses. They claim on their own employment histories.
Social Security was designed in an era when women did not work outside the home. It was considered unsafe. That is not the case today— and has not been for decades. I totally support a societal safety net, but not a system that funds ladies who lunch, watch daytime tv, or even keep the home fires burning while their spouses are free to work endless hours, forfeit childcare duties, etc to advance their careers. I do think this is an everybody in the pool situation. It’s unreasonable to ask current workers and retirees to pay more while some could pay but have chosen not to contribute anything while still expecting benefits.
I’m quite certain this approach would keep a lot more money in the trust fund than would ever be raised by considering Roth money for SS tax.
Not sure what details I disclosed, but whatever.
SS is not poorly administered. SS pays benefits based on taxed earnings and favors lower income workers in its benefit formula.
Roth is for upper income people not the bulk of American workers. So be it. Let it be.
You say SS pays benefits to independently wealthy individuals and yet you don’t want those benefits taxed for individuals whose independent wealth comes from a Roth account. I do get that at all.
It simply is not fair that a person with retirement income of say $40,000 has their SS benefits deemed taxable while a person with Roth income of $100,000 does not.
The reality, of course, is that the actual income tax bill will be quite small in any case as the $100,000 remains tax-free.
“Roth is for upper income people not the bulk of American workers”:
This is simply inaccurate particularly with the advent of Roth 401Ks. You must have a very different definition of “upper income” to include anyone with a 401K or IRA account evidently. If anything Roth participation should be encouraged and fostered not discouraged with taxation etc.
“You say SS pays benefits to independently wealthy individuals and yet you don’t want those benefits taxed for individuals whose independent wealth comes from a Roth account. I do get that at all”.
You are fixated on taxation vs prudent spending. There is also prudent taxation that does not induce disincentives in the wrong areas. Taxing Roths is a disincentive to a rare positive note in our economic universe.
“It simply is not fair that a person with retirement income of say $40,000 has their SS benefits deemed taxable while a person with Roth income of $100,000 does not”.
Again, step outside the echo chamber. Taxation is not the only solution. What is not fair is that you and I are even eligible to collect. By eliminating/reducing S.S. benefits for people like you and I, we are making a much bigger contribution to the solution. Expanding taxation on S.S. benefits is indeed minor in the scheme of things for people like you and I but to tax Roth in any manner has broader deleterious implications.
Roth is an incremental solution not a problem.
So people like us should not be eligible for Social Security, but should be able to generate an unlimited amount of tax-free income and then exclude that income when determining a modest tax on half our SS?
Sorry, I just don’t get that.
100% spot on in your interpretation Dick.
Look on the bright side, with a reduced or eliminated Social Security benefit you won’t care how it is taxed-nothing to tax.
I’m all about financial simplicity particularly in retirement.
Toward that end, all this talk of Roths whetted my appetite for another sizable Roth conversion yesterday.
Investing in a simplified future tax situation always gives me a dose of dopamine. I’ll get another dopamine hit when I make the associated sizeable tax pre-payment next month. That payment in effect gives Uncle Sam that tax revenue over 10 years prior to the beginning of my RMDs when he’d just begin to otherwise incrementally see this revenue. Once and done, no more tax calculations on that money after this year and Uncle Sam can spend it next month.. Win, Win. See, I have no aversion to taxes, I even like to pay them early.
I know you’ll never agree with my view on true independence from government dole but I do put my money where my mouth is on the topic of never relying on S.S. nor wanting anything to do with it. I will do it again next quarter with another Roth conversion.
And you are in a position to put your money where your mouth is and good for you no matter how you achieved that position. Nothing wrong with that.
However, that is not the position for the great majority of Americans and never will be. The government dole is the use of our taxes. The government does not have money.
For those in the lower two income quintiles, Social Security makes up over 80% of total family income.
For middle-income households, Social Security provides roughly 50% to 60% of overall income.
We are in complete agreement that folks in those positions should receive Social Security.
In the event my spouse and I ever are eligible at ages 67 and 70 respectively to receive S.S.; every dollar will be donated to Veterans’ and First Responder related causes.
BTW: Thank you for your service. I had a solemn stroll along the traveling Vietnam Memorial Wall recently and have visited the one in D.C. twice. It brings me to tears every time.
I’m all for people being more self reliant, but at the end of the day, I’m with Quinn on this one. People needed SS prior to 1938, and it’s still needed today.
Are you referring to overlapping groups? On the one hand, you claim that they’re deeply into Roths so not paying tax on SS benefits. On the other, you claim they’re requiring a safety net. Can’t have it both ways.
Fair to say there are multiple groups. Those with and those without. Those with minimum income and those with significant income sometimes tax free and sometimes not. I bet I’m not telling you anything you don’t know.
The groupings aren’t so simplistic. Folks can have substantial Roth holdings, but also traditional IRAs, pensions, royalties or other income that will definitely require tax payment on SS. But you seem to be focused on saving SS has it presently exists. Aside from politicians’ needs to satisfy everybody, that truly doesn’t seem possible. For sure, including Roth money in the calculation of MAGI won’t do much. The cash outflows also have to be tailored to current societal needs— not century old ones.
Dick, do you agree that withdrawing the contributions-portion of your Roth balance should never be treated as taxable income and also would not be fair to include in the earnings to determine if SS should be taxed? It was income before (when it was taxed) and shouldn’t be income again.
After tax contributions and earnings on those contributions are two different things and should be treated differently. The earnings should be counted toward the SS income test. If I buy a stock and it goes up, I only pay tax on my gain. The same applies here except we are not talking about taxing the gain just counting it in the MAGI for SS purposes.
None of the Roth contributions, nor their growth should be taxed retroactively, EVER. The contract was you pay the income tax going in, no tax on earnings, otherwise it would be another federal broken promise to seniors, just as potentially changing taxes on Social Security. If they want to make changes to how one’s personal retirement accounts make them only to changes to how future contributions are treated.
How naive of you to think that the govt shouldn’t reneg on the contract outlined by its financial regulations that created SS and IRAs. Haven’t you been reading this comment thread? We have a govt program here that is going to be underfunded soon. Gotta make someone lose (the consensus seems to be us).
The government is us, all 340 million of us. There aren’t too many laws and regulations that have not been changed as the times require.
The issue is not taxing Roth distributions, but counting the distributions as income solely for the purpose of determining the taxability of SS benefits.
That is effectively taxing Roth distributions, and I will vote against any politician who votes to tax Roth.
What can I say. If that’s the way you see it.
It occurs to me that in most conversations about Roth conversions, someone brings up “assuming Congress doesn’t decide to tax Roths.” Then the conversation moves on as if that would never happen. From the sound of some comments below, I wonder whether the possibility of cooking up public support for such a change isn’t so far-fetched. Converters beware.
I don’t recall if anyone has posted a link to the new tax calculator for retirees from The Finance Buff (aka Harry Sit). A search of HumbleDollar didn’t turn it up, so here it is: https://thefinancebuff.com/tax-calculator-for-retirees.html … It covers not only 2026 but also 2027, using 11 of the 12 monthly CPI data points to project inflation adjustments for the standard deduction and tax brackets and 2027’s capital-gains tax brackets, gift-tax exclusion limit, QCD limit, etc.
Thanks, Joe, quick and easy, I hadn’t used this before.
Seniors within certain income levels do indeed enjoy some extra perks come tax time. The same can be said of young parent(s) within certain incomes. In a recent post I detailed the results of two real tax returns I prepared. The tax liability was so low that a few commenters questioned their accuracy.
I’m sure not volunteering to pay higher taxes, still, taxes have been slashed for everyone at all income levels (both personal and corporate), while federal debt is about $40,000,000,000,000 and counting. It doesn’t seem that long ago when we had balanced budgets and a visible path to the elimination of the gross national debt.
Last year the Federal budget was balanced was 2001 under Clinton. Depends on what you definition of not that long ago. 🙂
David, I didn’t want to name names😊
Around $32 trillion of the $40 trillion national debt is publicly held. Accordingly this comprises a portion of the $174 trillion total U.S. household NET worth as of Q1 2026 (See FRED St Louis Fed).
Is the U.S. a wealthy country? Yes.
Is that national debt counter ‘clock’ that shows each person’s share of the debt per population division meaningful? No.
Having said that I do remember in the late ’90s, when the budget was balanced, projections for retiring the national debt. That all changed after next administration.
In an effort to give RDQ heartburn, I asked Google why SS was created :
President Franklin D. Roosevelt signed the Social Security Act on August 14, 1935, to combat widespread old-age poverty and economic insecurity exposed by the Great Depression. It was created to provide a permanent federal safety net helping retired, unemployed, and vulnerable Americans survive when they could no longer work.
So, help me understand why a program created as a “Safety Net”, should be taxed at all ?
Retirees who rely on SS as their safety net don’t pay taxes on SS and likely on their any other income, if any.
Mark, I’m going to set up a GoFundMe page to buy Tums for Dear Dicky.
Seriously, safety nets have to be paid for too, and I don’t think it fair to make current worker bees and their employers carry the entire load. I don’t like paying tax on our SS, but I understand the need to keep it solvent.
Lol Dan ! I understand what you are saying, nonetheless, paying taxes on what theoretically is a safety net is counterintuitive.
A portion of Social Security is taxable for several logical reasons. The primary reason was to add income to the SS trust as income taxes paid on SS are allocated to the trust, about $58 billion a year to the SS and Medicare trusts. Taxes paid on the extra 15% of SS taxable go to Medicare.
In the aggregate it is estimated that beneficiaries actually fund 15% of the lifetime benefits they will receive. Hence, up to 85% of SS benefits may be taxable. This is the same reasoning used for a contributory pension plan. Amounts above the workers contributions are taxable.
SS is designed to be self-funding so that seems fair to me.
SS is far more than retirement income, it is insurance against death and disability and provides benefits to millions of people on that basis all for the basic payroll tax and largely tax-free because of lower total income.
How SS is taxed is under review and one idea is to tax 100% of the benefit after benefits received exceed the workers tax payments. That would be around six years for most people. I can see that being quite a retirement planning shock.
The people who are paying the taxes don’t need the safety net. To say nothing of the fact that the society today is much different than it was in 1935.
Agree – I was expecting someone to make that point !
Seniors turn out to vote in much greater numbers than the young.Politicians take care of them.
And we hope they continue to do so!
“… If they had any amount of Roth income the picture would really change. …”
Of course, with Roth, they already paid taxes before making those contributions. Congress decided to provide a unique tax advantage regarding the investment earnings on Roth monies.
So, recognizing that the tax advantage on Roth investment earnings only applies if monies are deferred and not distributed until after the later of 5 years or reaching age 59 1/2, the 1997 Congress, and the 2001 Congress (EGTRRA, for Roth 401k), and the 2006 Congress (PPA 2006, for Roth 401k after 12/31/10) obviously designed this, and reconfirmed the treatment with the expansion to 401k, anticipating these monies would be used after reaching retirement age.
As Congress never changes the tax code, those who saved via Roth contributions when in their 20s and 30s and 40s can rest assured that the tax treatment in effect for almost 30 years won’t ever change.
The only time I will “rest assured” the the government will not change the agreement we have had for forty years is when I’m “permanently resting” and it won’t matter to me (if you know what I mean). 😉
I save money in a Roth on an after-tax basis and when I use the money the earnings are tax-free.
I save money on a pre-tax basis and when I use the money the earnings are taxed as ordinary income.
I don’t see the logic or fairness.
Even worse, Roth withdrawals are excluded from MAGI for determining taxability of SS benefits. It’s still income, taxable or not.
So, in theory a retiree could have unlimited Roth income and not pay income taxes on Social Security. Sorry, the logic escapes me.
At the same time, tax-free interest, also income, is included in MAGI.
Why shouldn’t gross income, taxable or not determine if SS is taxable income? That seems a fairer way to determine the financial ability to pay taxes.
Dick,
Logic has nothing to do with it. We’re talking about the government here.
I wonder if Quinn’s opinion on this would be different had he put any money in Roth. Mine is that they should just tax all Soc Sec and get rid of these silly calculations.
Nope, not different because not using Roth income in a calculation that is supposed to determine income relative to paying higher taxes, especially when targeted to help fund SS and Medicare is not logical.
As it is the highest income retirees using a Roth avoid contributing to the needed funding.
What evidence do you have that highest income retirees are using Roths to avoid SS taxes? Up to a few years ago, higher earners couldn’t fund Roths, and Roth conversions by people with comfortable retirements are taxed and included in MAGI.
Perhaps should have used higher income rather than highest. In any case here is my point.
$100,000 to $200,000 (The “Sweet Spot”): Highest overall usage and contribution rate. Households in this range have sufficient disposable income to maximize annual contributions, but their income remains under the IRS direct contribution phase-out limits.
$200,000+ (High Earners): High demand, but constrained by law. Single filers making over $168,000 and joint filers making over $252,000 (for tax year 2026) are phased out from contributing directly to a Roth IRA.
However, high earners heavily utilize Roth 401(k)s (which have no income caps) and “Backdoor Roth” conversions. Source: Fidelity Investments
An example as to the logic/fairness:
Example Assumptions: $10,000 of earned income allocated to 401k/IRA contribution, 25% federal tax, 3x return over working years
Regular 401k/IRA: $10,000 starting balance (no tax upfront). 3x return = $40,000 balance at retirement. 25% tax rate on withdrawal = $30,000 after tax balance at retirement.
Roth 401k/IRA: $10,000 – $2,500 current tax = $7,500 starting balance. 3x return = $30,000 after tax balance at retirement, same as the regular 401k/IRA.
Seems pretty fair to me.
As to why Roth withdrawals are excluded from MAGI, per AI:
“The Roth Incentive: When Congress created Roth rules (modeled after the Taxpayer Relief Act of 1997 for IRAs and later expanded to workplace plans), the core promise was “tax-free growth and tax-free withdrawal” in exchange for giving up the upfront tax deduction. Including qualified Roth withdrawals in MAGI would break that legislative promise and penalize savers twice.”
Congress had their reasons when passing the law, at least part of which was surely getting more money upfront.
Okay, but that has nothing to do with funding SS by taxing a portion of benefits.
The income from Roth should be considered in determining the taxability of SS benefits on the basis that income in retirement is income and thus if you have $100,000 in Roth income or $100,000 in other income, both should be considered for the purpose taxing SS benefits. Both determine a persons total income and ability to pay taxes on SS.
$25,000 in pension income can trigger SS being taxable, but $100,000 in tax-free income from a Roth can’t, but $25,000 in tax-free interest income can.
You honestly think that makes sense especially given the purpose for taxability of SS in the first place?
Isn’t your premise really just another way of taxing Roth (indirectly)?
Money is fungible.
…just a thought…
I agree with you, R. Quinn. I wouldn’t be surprised if, in the future, the definition of “income” used for various government programs changes as more people move money into Roth accounts. New Jersey is already an example of this. In New Jersey, Roth distributions are included in the income calculation for its property tax relief program. I could see the federal government eventually taking a similar approach with income thresholds for certain benefits and programs, especially the taxation of social security, and IRMAA thresholds.
If the Federal Government were to look at individual states for benchmarking on how to diminish the economic quality of life of its citizenry, New Jersey would be an excellent benchmark.
Luckily, there are 49 more states to benchmark.
As someone whose family has lived in NJ since the 1840s that makes perfect sense as does cutting income limits for the StayNJ property tax relief program.
Jay, your example is spot on. Roth earnings are effectively “pre-taxed” in that the principal subject to growth is reduced by the initial tax rate. A couple of other things are worth noting.
1) A Roth contribution is taxable income and part of that year’s AGI/MAGI. A Roth conversion amount is also part of that year’s AGI/MAGI. In Jay’s example the full $10,000, including the $2,500 in tax, would be part of that year’s AGI, even though only $7,500 was invested in the Roth.
2) Roth contributions are taxed at the marginal rate in the year of contribution. If the marginal rate in the year of distribution is lower than the initial rate, the Roth effectively loses money when compared to a traditional account.
3) In the unfortunate situation that a Roth IRA lost money, there is no offsetting consideration for the loss. So you could pay taxes on the full amount at contribution, and then withdrawal a lesser amount, locking in a tax loss. This does not happen in a traditional IRA; you pay taxes on the amount withdrawn. This can be an advantage in a Roth conversion if you sell on a dip, and invest in the Roth at the lower valuation.
4) Unlike Muni funds, Roth accounts are subject to IRS rules for qualified accounts, including holding periods and penalties, by design and policy. Qualified distributions from Roth accounts are therefore more like withdrawals from after-tax savings. Congress set it up this way.
It all boils down to who has the means (income) where part of the SS benefit should be taxable.
Whatever that point may be, the source of that income should not matter, taxable or not.
I have to admit that is a unique way of looking at Roth earnings – pre taxed because they were earned with after tax dollars? I wish the IRS would consider all my investment income pre-taxed.
Regardless, the point being that shouldn’t the taxation of SS be based on the ability to pay, by total income regardless of sources? The taxation of SS should be based on 1/2 of the SS benefit plus all other forms of income (earnings) taxable or otherwise.
Not unique at all. It is commonly known that the choice between a traditional or Roth account is whether you pay the tax up front or at withdrawal. Jay’s example clearly shows it is mathematically accurate. IN the traditional example, the $40,000 distribution is taxed $10,000 – $2,500 on the original $10,000 contribution, and $7,500 on the $30,000 earnings. In the Roth the $2,500 is paid up front, and the original $7,500 contribution produces earnings of $22,500 – exactly $7,500 less than the $30,000 earnings in the traditional account. The reduction in earnings is caused by the tax at contribution, thus I (and others) said it is effectively “pre-taxed”. If you can provide a numerical example that refutes this , please do so.
Congress and the IRS provide all manner of tax incentives and breaks on any number of items. We get preferred CG and qualified dividend rates, One could easily argue that the tax free nature of muni bond interest is unfair to lower income citizens.
You really think it fair that one person with income of say $100,000 does not have their SS taxable and another with income of say $35,000 does simple based on the source of that income? Even worse, because it is tax-free the $100,000 has the value of perhaps $118,000 to $120,000.
It’s not even worse that Roth withdrawals are excluded from MAGI, it’s better that they are excluded.
Not better for the SS trust.
I agree with your logic, Roth IRA withdrawals are certainly income when it is withdrawn and should be included in MAGI calculations for determining IRMA and SS taxability!
Yeah, but that was the bait that the government used to get people to invest/convert in Roths. I’m afraid of the second part of the saying, the switch, as in bait and switch.
rq, i’m sorry, but you’re not thinking very clearly
Please explain your comment. I’m interested to hear your view on this.
withdrawing, or “using the money,” from a roth, or from a non ira account is not income. when you earned the money it was income. when/if you earned interest on/in a non ira account that is also income.
Ok, so perhaps a better term is “asset”. Regardless of how it was earned or how it is (or is not) taxed, it is $ available to be used. I agree it is not current income, but a very likely a direct result of previous income.
I want to buy a new whatever. It costs $50,000 Where am I going to get the money?
My choices are from a Roth account, from a IRA a 401k.
No matter where it comes from I have generated income (unearned income for sure), but money to spend to make my purchase, money I have not paid taxes on.
The money I take from Roth is tax-free, the money from the IRA and 401k all taxable.
The Roth earnings were never taxed, the others were never taxed. Same earnings, but the others are taxed as ordinary income. If I had a 4th choice, say a brokerage account and used earnings they would be taxed differently again.
My point is if I acquire money I didn’t have before (earnings on investments) and use it to spend thus affect my lifestyle or pay bills, why should it not all be treated the same when it comes to determining my income/resources and taxability of SS benefits. It’s income to me no matter what it’s called.
I understand Roth is intended to boost retirement savings although I see no reason to treat 401k/IRA earnings differently.
Why shouldn’t those earnings also intended for retirement be tax-free even while pre-tax contributions and employer matches are taxed as ordinary income when withdrawn because that’s what they were- deferred ordinary income?
The IRC is the IRC, we know how it works in this case, that doesn’t make it fair or logical.
Someone with a retirement “income” of $100,000 should not be able to avoid taxing SS while a person with half that income has taxable SS benefits simply based on the source of the non-SS income which is either interest, dividends or capital gains in all cases in this example.
Agree that the Roth IRA withdrawals themselves are not taxable income, the question is about the fairness of whether or not the withdrawn amount should be included in the IRMA and SS taxability calculations.
The way various plans work isn’t about fairness. They are set up differently and people can decide to participate or not. Roth isn’t the only kind of account where earnings on money isn’t taxed or included for MAGI. Withdrawals from 529s aren’t either if the money is used for specified purposes. My granddaughter’s account more than tripled in value because I made big contributions until she was 10, and then stopped. Unfair?? I’d say just lucky!
This post was about treating money acquired in different ways differently when used to determine SS taxability.
It’s not a matter of the legal definition of taxable income, but that some of the money is simply ignored for SS tax purposes. My income says I must pay tax on 85% of our SS benefits. Would you think it fair if all my income was from a Roth account and now my SS benefits are taxed-free?
Legal, yes, fair or logical? Not in my view. It is an unfair advantage to higher income earners who can accumulate large Roth account balances.
529s are not paid to the saver or beneficiary, they are not federally tax advantaged. If you were to take out the 529 money and not use it for education as allowed, earnings would be taxable to you. Now there is a limited exception to put some unused 529 money in a Roth for the beneficiary
The suggestion that Roth account holders are higher income earners who accumulate large Roth balances is painting with too broad a brush.
My son has been working for a non-profit for three years, earning less than $40,000 each year. But he has been funding a company sponsored Roth 403(b). I don’t know what he will earn in the future, and I don’t know how much that Roth will grow in the next 30 years. I DO know at this point, he is not a high income earner.
Let’s say he continued to work at that job for the next 30 years. And that he averaged a 3% merit increase raise each year. In 2056, he is earning about $97K. Of course, inflation will take a huge bite out of that along the way.
Let’s further say he sets aside $4K each of those years in his Roth paying and it grows 7% year. In 2056, he has about $500,000 in there.
Is this the profile of a person for whom Roth distributions should count as income for the for the purpose of taxing his Social Security benefits?
Ok, Peter Thiel won’t pay SS tax on his $5B. Roth earnings. But during my entire working life, my earnings were too high for me to fund a Roth. Those who could earned far less. They were never high earners. I don’t see why you begrudge them this tax break, I have no problem paying on my 85%.
As for the 529, my granddaughter could —I definitely hope not— blow through all that tax free tuition, living expenses money without becoming “educated.”