Vanguard leaders discuss Social Security, Medicare, and Roth IRA conversions


Vanguard retirement investment strategist Maria Bruno and Kahlilah Dowe, Certified Financial Planner™ professional with Vanguard Personal Advisor Services discuss how the timing of a Roth IRA conversion could affect Social Security, Medicare benefits—and taxes.

Notes:
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.
© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.  


TRANSCRIPT

Amy Chain: Thank you. Let’s take a question from Jeffrey in Virginia who says retirees with large traditional IRA balances and have not yet begun to take minimum distributions, what should be considered in deciding about whether or not to do a partial Roth conversion?

Maria Bruno:
Yes, I think I would add the Social Security claiming strategies is an interesting one that factors into this as well too. Because as individuals are approaching, and, again, that’s a one-time event in terms of when you decide when you’re going to take Social Security. So for our listeners that have already begun taking Social Security benefits, then this doesn’t apply to them. But for individuals as they’re thinking through this, there’s a significant value in deferring Social Security until age 70, for instance, which is the latest time that you can in terms of maximizing both lifetime as well as spousal benefits.

But for many retirees, they need income. So in that situation, if they have large balances, it may make sense to either, I would say, conversions could be a possibility, but most likely could be drawing down those tax-deferred assets as a way to meet their living expenses.

So to think about it not just in the context of the tax situation now versus later, but the interplay is, clearly, I had mentioned with Social Security, the potential taxation of Social Security, and then the Medicare benefits is a big one. And this doesn’t really necessarily manifest itself until two years after the conversion, and maybe we’ll talk about that a little bit.

Now if you are taking Medicare benefits, so the Part B premiums are based upon different income thresholds, but there’s a little bit of a lag. So, for instance, if you do a conversion in 2016, the tax return that’s filed in 2017 is what determines the 2018 Medicare premium. So if you do a conversion and it brings your income higher, it’s not just the tax situation, but it could potentially impact your Medicare premium two years later for that year. So to be thoughtful with these financial planning strategies collectively, not just the income tax.

Important information

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.

Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor.

© 2017 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor of the Vanguard Funds.