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Roth IRA & Social Security: The Ultimate Retirement Plan
retirement planning is a crucial aspect of our financial lives, and it becomes even more imperative as we age. Two commonly discussed components of retirement planning are the Roth IRA and the Social Security program. Both of these options play important roles in securing a comfortable retirement, and understanding how they work together can lead to the ultimate retirement plan.
Let’s start by understanding what each of these options entails.
Roth IRA:
A Roth IRA, or Individual retirement account, is an investment vehicle specifically designed for retirement savings. It differs from a traditional IRA in that contributions are made with after-tax dollars. Although contributions are not tax-deductible, the real benefit lies in the fact that qualified distributions during retirement are tax-free. This allows your retirement savings to grow tax-free over time, providing greater flexibility and control over your retirement income.
Social Security:
Social Security is a government program that provides income to individuals who have reached retirement age. It is funded through payroll taxes paid by employees and employers during their working years. The program guarantees a monthly benefit based on your earnings history, along with other factors such as age of retirement and the number of years you have contributed. Social Security provides a safety net for retirees and ensures a minimum level of income, regardless of other retirement savings.
Now, let’s delve into how the Roth IRA and Social Security can work together to create a powerful retirement plan.
Maximize Tax Benefits:
One of the advantages of having a Roth IRA is the ability to withdraw funds tax-free during retirement. By contributing to a Roth IRA early on and consistently over time, you can accumulate a significant tax-free nest egg. This can be particularly beneficial for individuals who expect to have higher income in retirement, as it allows them to potentially avoid higher tax rates. By optimizing your taxable income during retirement, you can minimize the impact on your Social Security benefits, as these benefits may be taxable depending on your income level.
Flexibility with Income Sources:
Having a Roth IRA in addition to Social Security provides flexibility in terms of where you withdraw your retirement income from. Social Security benefits are typically fixed and adjusted for inflation, while withdrawals from a Roth IRA can be more variable based on your financial needs. By using your Roth IRA as a supplemental income source, you can have greater control over your income stream during retirement, potentially minimizing the impact of market fluctuations or unexpected expenses.
Guard Against Uncertainties:
Social Security provides a guaranteed income stream for retirees, but concerns over its long-term sustainability have been raised. By having a properly funded Roth IRA in addition to Social Security, you can create a safety net to guard against uncertainties. If changes to the Social Security program occur in the future, your Roth IRA can serve as a backup source of retirement income, ensuring your financial security remains intact.
In conclusion, the Roth IRA and Social Security are both important components of a comprehensive retirement plan. By optimizing the tax benefits of a Roth IRA, maximizing flexibility in income sources, and creating a safeguard against uncertainties, you can create the ultimate retirement plan that provides financial security and peace of mind in your golden years. Remember, it is never too early to start planning and saving for retirement, so take advantage of these options to secure your future.
So why not move the IRA money to the ROTH during the cash spending years? Since their income will be basically zero, the taxes would be less.
thanks
How about taking out from pre tax up to their standard deduction and the rest from taxable. This will draw down their ira and make their taxable last longer. They could also delay ss a few more years. Or if they want Roth conversions then they should start the process in the first year since they are living off their taxable account anyway.
This was an excellent video!!!
Josh. Please do a video for retired persons and QCDs. It's another way for seniors to avoid taxes or IRAs while still giving to their charities.
Josh, why wouldn’t they at LEAST rmd’s to $19k after 60 and the rest in cash? Am I correct that they wouldn’t pay any tax because there income is $19k? And for that matter withdraw as much as u can BEFORE social security so they don’t tax social security.
I have a small ROTH that will have about $17k in after next year's contribution. Wish I had known earlier about the ROTH. I will be retiring on January 1st of 2022. Is is worth for me to keep this? Will be able to start taking any gains out in April of 2022 a few months after I retire. I will not have to rely on this for retirement as I will be receiving Social Security and Virginia retirement. Also have contributed to my 457 and received the maximum match in the 401a cash match.
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While money can be spent and earned, time can only be used up but just once. After that time has passed, it's gone forever. You can never physically relive that moment again. This is why passive income is so important
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So it’s some sort of an advantage to convert the IRA to a ROTH after retiring? Why wouldn’t you just draw the IRA money out as needed at the 12% rate because you put it there to avoid paying 28% when you were working?
Way too simplistic imo. You don't want to deplete the taxable savings down completely. Better plan is to take 30k from IRA, roll 50k and use 25k from taxable, extra 5k is for taxes. At 66 run numbers, may want to continue and defer SS until later depending on balances. You want the Reg IRA balance to be below 500k +/- so when one dies the RMD doesn't push taxes too high.
This is an awesome video to discuss. Many of us fall into this planning. My question or concern is the $10k difference in expenses vs income. If you are able to secure $1.5M and retire early, I would suggestion that difference is far greater than $10k/yr. What do you do when your expenses are say $90k? Now when you do Roth conversions of $50k annually for the future, you are also obligated to pay taxes on the $40k income from your IRA distribution. Now you have $90k income and you are into the 24% tax bracket. Please offer advice on how to stay under the large increase in taxes and where to pull income from.
perfect would be having enough in retirement to live off of interest
Nice dream
After the AMA stole my livelihood, my future income, and my Roth, I had to tighten my belt quite a bit.
I'm confused. You are allowed to put 50k a year in a Roth? I was told you can only put in $7,500 a year. I'M 62 and not a financial wizard.
Josh. Are you saying the 50K will be uniform for the next 7 years? How about inflation? you essentially have 300K make less than 1% interest while losing 5% plus to real inflation. I don't like at all what you are proposing. My advice to them is the following. Sell the bonds and invest 1.2 million in a group of dividend aristocrats that will yield about 4.2%. With stocks like AT%T, PPL (electric utility) and others you will have no issue in making that yield. that will give you 50,400 and as you know if this is the only income it will be tax-free as these are qualified dividends. And they will have the 100K as a backup. The get the SS at 62 and put that into a Roth. So now they have their 50K to spend, they cover inflation roughly because the dividend aristocrat stocks increase their dividends every year, and they establish a Roth.
And what if Social Security isn't there? We have to start thinking outside of the box.
I thought you need earned income to contribute to a Roth and it is capped at 6k a year each. How are they converting 50k a year to a Roth with no earned income in retirement? I am probably missing something here. Any insight is appreciated.
Absoutely! It's like a chess game, moving your money to your Roth IRA accounts for as little tax as possible. I would also add that by earning just $4k/year of earned income and contributing it equally to your Roth IRAs you can use the form 8880 saver's credit as a shield to usher up to $39k through a Roth conversion completely tax free if you're living on cash. So many games to play and they're all fun!
Wish you started this channel in 2007 when I joined YT. Whole different life…
I’m still well into my accumulation phase, but I’m contributing to Roth accounts now so as to not need to worry about doing conversions in my retirement years. We’ll still have pre-tax funds, but I’ll draw from them first. This is especially important because theoretically, I should also be getting a pension, which will already be driving up my taxable income.
Since when can you contribute 50000 to a Roth .
RMD will hit at 72. Hopefully pretty small by then, but that'll probably be all or most of their 10k living, plus some tax payment funds.
Thanks Josh love the white board.
I think one has to determine what future tax rates will be. The current tax plan runs until Jan 1, 2026, but I can see it being changed should Biden win the election. So would it make better sense to take living expense out of the traditional IRA now, and use the cash to do additional Roth conversions? It might make sense to do conversions up to the 24% bracket, as tax rates will go back to the previous levels and might be even higher due to all the deficit spending taking place. It's usually said if you can pay the conversion tax with money outside of the of the plan the better off you are. $300k could go a long way to making that happen!
I would fill the Standard Deduction with taxable income in years 1 through 6, getting $200k of that IRA into a Roth for free! Learned that from Josh Scandlen on YouTube.
They still have 170k in bonds in the pre-tax account plus around twelve years of growth in Roth (so it may have doubled). Sweet!!!
Hey I have to say this is a absolutely terrible plan. I can only think of a few ways that would be worse than this plan. I think if you had it 100% in index's rather it's in a roth or a taxable account if they lived on 3.65% a year of the proftilo like having it in VTI for example and living on the dividends which is a average of like 1.8% and then take out the difference which would be 1.85% that would actually last forever if you keep it invested for the long term. My plan myself when I retire is to only live off of 1.8% so I can only live off of the dividends of VTI so I would never have to sell any printable ever so the account could just keep growing and in fact with doing just the dividends of like 1.8% a year the account would be growing and that would mean you could increase your spending over time. For me my goal is to be able to have 1.8 million in a taxable account to live off of the 1.8% a year and that way I would let my 401k, ABLE, Roth IRA, HSA, and stuff like that to keep on growing forever. And that way my taxable account could grow forevor as well but not qutie as fast sense I would live on 1.8% a year once that grows enough though I would likley lower the amount I live on prestange wise than that. Sense the tax bracket for qualfied dividend and distributions is 0% on up to 52k but the not qualfied one's you would have to and on average from VTI it's like 30% of what you take out or so it not qualfied if that makes sense. I have a long way to go to get there. I am going to be 21 next month and I have around 20k invested and 10k in like cash assets. My highest income I have had so far was like $18293 a year after taxes I am working on increasing my income though so I can invest even more money. I would have to be able to invest a lot of money in order to take advantage of the tax advantage accounts while putting in enough to be able to get to 1.8 million early which would be like $1028 a month i the taxable account a month to have around 1.8 million at 49 or so getting a like 9.8% a year on average. The plan hear is not the worse I have sean but I would say it's not a very good plan. I will say when you are reited having like 2-4 years of living expensive saved up in cash for a effeminacy fund would be alright to do though. That would not be so bad. But regardless of what accounts it is in living on 3.65% a year would be safe and if they did that, it would be $47450 a year which is almost 50k a year for them and that would be to last forever and not even taking in account there social security income they will get later.
The 300k cash will support 5 years of income and pay the taxes on 500k of Roth conversions.
Iras will probably grow 40-65,000 a year. They are likely to still have close to 1 million when rmd’s kick in, if only converting 50k. Maximize the 12% tax bracket with conversions and or income distributions. Generate additonal income by Taking cash down to 3 years and replace it over time in the years stocks are flat or up
It depends on the person. My wife and I have pretax 401k, taxable, and roth iras. We will spend down the pretax 401k. Use the taxable step up basis and tax free roth iras for our kids. I may not leave anything at all to the kids if health care costs are still our of control in 20 years!
The SS will be taxed but you can off set with the money from the Roth. Sounds like a great plan.
Thanks to you I put in my retirement notice for this December last Friday. After your teaching i have confidence in the next chapter. 🙂
Great video.
You also assume they won't start double taxing Roth IRA's between now and 30 years from now
Hey Josh! I really enjoy your content and think its AMAZING that you're helping the more inexperienced folks out. I was lucky enough to get a good understanding of what to do with both my military and civilian TSP's early on, but I see so many people roll up to age 55 and realize "I got nothin in my account!" I'd love to do a collaboration as I think our audiences intersect well, I think we could do a solid job educating some more of these cats out there. Love what you're doing, reach out any time. Filipowiczclayton@yahoo.com or hit me up through twitter or insta @ClaytonFilpo
Why wouldn’t you want to spend AND convert from the fully taxable IRA first and keep tax-free money mostly for later instead.of spending it all down regardless of market conditions during those bridge years? Seems a better strategy would have been to position more of the IRA in “cash” while the market was high the last few years rather than all in the bank. Seems as a couple you could optimize both what to spend and what to convert within a tax bracket on an annual basis – along the lines of a barbell.
Can you do a video about how to manage an HSA in retirement amigo first using the funds for health expenses in retirement or use the funds for non health related it expenses and use it the money for anything else
Josh – As good as this sounds, I think the devil is in the details. They will be paying at least 12% taxes on those 50k annual conversions and once their SS starts, they will get hit with the tax torpedo. They also will be wasting their personal exemptions of of 27k+ per year from age 75 and after. I agree that Roth conversions are in order, but not the whole thing.
$50,000 tax free in retirement is equal to $75,000 or more in wages.