Roth Conversions Can Cut Taxable Social Security by 40%

A large tax-deferred balance can quietly push up to 85 percent of a retiree's Social Security check into taxable income — unless Roth conversions start before retirement.

Retirees holding most of their savings in traditional IRAs and 401(k)s can push up to 85 percent of their Social Security benefits into taxable income by default, a predictable outcome that early Roth conversions can shrink by roughly 40 percent.

"It's not a mistake. It's what happens when there's no planning for the tax impact of retirement withdrawals," said Kyle Hammerschmidt, founder of MOKAN Wealth Management, who reviews retirement plans for self-made 401(k) and IRA millionaires.

The IRS decides how much of a benefit gets taxed using provisional income — regular income plus tax-free interest plus half of the Social Security benefit. Married couples filing jointly start owing tax at $32,000 of provisional income and hit the 85 percent ceiling above $44,000; single filers cross at $25,000 and $34,000. Those thresholds have not been adjusted for inflation since the 1980s and 1990s, so a couple with a modest combined income can land at the maximum simply because the numbers are outdated.

The stakes compound because income piles on itself: an IRA withdrawal is taxed, that income pushes more Social Security into the taxable zone, and Medicare premiums climb alongside both through a two-year income lookback. A single $60,000 withdrawal can push a middle-income retiree through both thresholds at once, according to tax guidance on IRA distributions.

The one exception is a Roth IRA. Money pulled from a Roth does not count toward provisional income, does not appear on a tax return and does not raise Medicare premiums — the only source of retirement income the IRS leaves alone.

Hammerschmidt frames retirement savings as three buckets: money already taxed (a brokerage account, where tax is owed only on growth), money not yet taxed (a traditional IRA or 401(k), where every dollar withdrawn is ordinary income and where most people hold nearly all their savings), and money never taxed again (a Roth IRA). When almost everything sits in the second bucket, every withdrawal pushes more Social Security into the taxable zone.

Roth Conversions: Building the Tax-Free Bucket

The most reliable way to build the tax-free bucket is a Roth conversion — moving money from a traditional IRA into a Roth and paying income tax on the converted amount that year. After that, the money and all future growth come out tax-free and never count toward provisional income again.

The window is shorter than most people think. It typically opens in the years just before or after retirement, before Social Security starts and before required minimum distributions force taxable income onto the return at age 73 or 75. Income is usually at its lowest during that stretch, which means lower rates on any conversion done then.

Three approaches work in practice: filling the current tax bracket by converting just enough each year to use up the room; converting larger amounts over a shorter window when a balance is too large for small annual conversions to move the needle; and converting more aggressively when the market is down, since the same number of shares costs less in tax.

A $1.8 Million Couple, Two Paths

Hammerschmidt's example: John and Karen, both 60, hold $1.8 million in traditional IRAs, $200,000 in a brokerage account and almost nothing in a Roth. They plan to retire at 63 and need about $150,000 a year. Their combined Social Security benefit is roughly $70,000 at full retirement age, or about $53,000 if they claim early at 63.

On the default path, they retire and claim at 63, then pull the remaining $97,000 straight from the IRA. Provisional income comes out to roughly $123,000, well past the $44,000 ceiling: about $45,000 of taxable Social Security stacked on top of the $97,000 withdrawal.

On the coordinated path, starting at 60 while still working, they convert a portion of the IRA to Roth each year, paying the tax from income and the brokerage account so the full converted amount keeps growing tax-free. They keep converting through their mid-60s and wait until 67 to claim Social Security at the full $70,000. By then the Roth is large enough to cover roughly $40,000 of annual spending tax-free, with the remaining $40,000 from the IRA. Provisional income lands around $75,000 instead of $123,000 — substantially less Social Security taxed and a large share of spending arriving with no tax bill.

Same retirement date, same lifestyle spending, a meaningfully different tax outcome for the rest of retirement. The only difference was starting at 60 instead of waiting until the options had narrowed.

Most people don't choose to pay the maximum tax on their Social Security; it happens because they didn't plan for it, which also means it's predictable enough to fix. Run a provisional income number, figure out how much room is left in the current bracket, then start moving money into the Roth bucket even a few years before retirement. The window narrows every year that passes. The Social Security Administration's benefit estimator and IRS Publication 915 are good starting points for running the numbers.

This content is for informational reference only and does not constitute professional advice. Tax rules and thresholds change; verify current figures against the latest official announcements from the IRS and Social Security Administration before acting.