Episode 111 – Maximizing Social Security & Roth IRA Conversions with guest Mary Beth Franklin, CFP

Episode: 111
Originally Aired: January 16, 2015
Topic: Ed Slott, CPA, on the End of the Stretch IRA

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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Social Security Benefit Maximization and Roth IRA Conversions
James Lange, CPA/Attorney
Guest: Mary Beth Franklin, CFP
Episode 111

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  1. Guest Introduction: Mary Beth Franklin, CFP
  2. Making Social Security Work the Best for You
  3. Social Security vs. Private Annuities
  4. Apply and Suspend
  5. Best Time to do a Roth Conversion
  6. Increased Taxation of Social Security or Medicare Part B
  7. Synergy between Social Security Collection and Roth Conversion
  8. Social Security Benefits after a Divorce

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1. Guest Introduction: Mary Beth Franklin, CFP

David Bear:  Hello, and welcome to this edition of The Lange Money Hour, where smart money talks.  I’m David Bear, here in the KQV studios with James Lange, CPA/Attorney and author of two bestselling books, Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again.  If you’re planning for your retirement, you should know that significant and long-term financial gains can be achieved by maximizing your Social Security benefits in conjunction with a Roth IRA conversion.  For insights on the strategy, we welcome Mary Beth Franklin to today’s Lange Money Hour.  A nationally recognized financial writer who focuses on retirement issues, Mary Beth is a contributing editor at Investment News, and author of the “Retirement 2.0” blog.  A long-time senior editor at Kiplinger’s Personal Finance magazine, Mary Beth’s weekly personal finance column also appeared in more than 200 newspapers nationwide.  She’s been a guest on NBC’s Today show and Meet the Press, CBS’ The Early Show, CNN, and numerous other television and radio programs.  So, stay tuned for an interesting and informative hour, and listeners, since our show is live, you can join the conversation by calling the KQV studios at (412) 333-9385, and without further ado, I’ll say hello, Jim and welcome, Mary Beth.

Jim Lange:  Welcome, Mary Beth.

Mary Beth Franklin:  Thank you.  I really appreciate the invitation to be here tonight.

Jim Lange:  Oh, it is literally my honor.  I’ve always considered you one of the most knowledgeable financial writers in the country, and I mean that sincerely, and I’ll put you up there with Jonathan Clements and Jane Bryant Quinn and, you know, we’ve done a lot of work together, mainly when you were at Kiplinger’s, and I always knew that when you were involved in a column that it was going to come out right and it was going to come with perspective.  So, it’s really an honor to have you on here.

Mary Beth Franklin:  Well, thank you.  I’m flattered, and I really take great pride in my work, and I love spreading the word to consumers about how you can take control of your retirement, but it does take planning.

Jim Lange:  Well, the other thing that was so perfect for having you as a guest, one of the areas that I have been involved with lately in my own, let’s say, research is combining techniques for both Social Security and when to take Social Security and Roth IRA conversions, and I know that you have deep knowledge of both Social Security and Roth IRA conversions.  So, I thought, who could be a better guest to explain some of the concepts than you?  So…

Mary Beth Franklin:  Well, I think we’re going to have a great conversation!

Jim Lange:  I think so!  And for people who are interested, and I think that that should be practically all our listeners, in reading more about your information and just getting more of you, and then you just made a very generous offer, which was to answer people’s questions, that people should know that they could go to www.investmentnews.com, which has your column, and apparently a place to ask questions.  Is that right?

Mary Beth Franklin:  Right, and you can also e-mail me directly at mbfranklin@investmentnews.com.  I try to answer everybody’s e-mail, but frankly, I get about 300 a week, so sometimes I don’t get to all of them.  But my goal is to really make Americans aware of this incredibly valuable benefit, and I think people should make their decision about when and how to claim Social Security benefits just as if it’s any other investment decision.  It’s that important.

2. Making Social Security Work the Best for You

Jim Lange:  Well, I agree with you completely.  In fact, I’m kind of amazed at how badly people choose, or what they have done really is not in their best financial interest.  So, why don’t we start with the meat of the show by talking about some general concepts of Social Security, then maybe get into apply and suspend?  So, let’s say that we have some listeners and they are…I don’t want to say shortsighted, but I’ll just say not educated in this area…and they’re thinking, “You know, I’ve been working.  I’ve been paying into Social Security.  Now that I’m 62 years old and I’m retired, I’m just going to take my benefit right now, and yeah, I know that I can wait a little longer and get a little bit more, but I don’t know if the government’s going to be there or not.  I just want to take my Social Security.”  How would you respond to somebody who has that type of mentality, but might be a little bit open-minded if you could give them some convincing information about why that might not be the best scenario?

Mary Beth Franklin:  Well, frankly, I hear that all the time, and let me give you a little background of why I got into writing about Social Security.  I know you’re broadcasting from Pennsylvania.

David Bear:  From Pittsburgh.

Mary Beth Franklin:  I’m from Pennsylvania myself.

Jim Lange:  All right!  Where from?

Mary Beth Franklin:  From the Philadelphia area.

Jim Lange:  Oh, that’s too bad, but go ahead!

Mary Beth Franklin:  And I am one of five children…oh, it’s a great place to be!

Jim Lange:  I’m just kidding!  That’s that Pittsburgh, Pennsylvania rivalry.

Mary Beth Franklin:  There’s always a rivalry!  And, in fact, my editor at Kiplinger’s magazine was a stalwart person from Pittsburgh, so we always had that rivalry.  But I was one of five children, and my siblings are much older than I am, and I would watch one after another claim their Social Security benefits at 62, keep working, and then complain that they were giving benefits back to the government because they were collecting benefits early and still working.  And I felt, well, that’s really stupid.  So, I decided to research the rules of Social Security, and when I wrote my first story for Kiplinger’s magazine on this subject in 2008, let me tell you.  The story was called “Secrets of Social Security: Four Ways to Maximize Your Benefits.”  The floodgates opened.  I received so many letters, e-mails and phone calls, and this is not an exaggeration, I set aside the first hour of every workday for a year to respond to the questions.

Jim Lange:  Wow!

Mary Beth Franklin:  And I thought, “Wow!  The American public has this insatiable appetite for information about Social Security benefits, and nobody’s giving it to them.”  So, I decided I was going to be the person to help educate Americans about Social Security.  Now, mind you, I said that in 2008.  Something else happened in 2008: our stock market went crazy and our economy followed.  And everything we thought we knew about retirement planning changed, because, in the old days, 75% more people claimed Social Security benefits at 62 because they could and because many of them retired at that point and many of them had pensions.  And now, we’re in a world where it’s very hard to find a traditional pension, interest rates are next to nothing, and many people are saying they’re going to work longer because they have to, to build up their savings.  Those three things together have changed the reason why people need to think differently about Social Security.

Jim Lange:  Okay, well, that’s a good start.  And let’s add the marital piece later, but let’s just assume, for discussion’s sake, that you have somebody who is retired at age 62, and they have the choice of collecting Social Security now or consider waiting until either 66 or even 70.  What should they be thinking about, and how do the numbers work for those kinds of decisions?

Mary Beth Franklin:  Right.  Let’s start with the basics.  The current normal retirement age right now for someone to receive full benefits is 66 years old.  It used to be 65.  You can still get benefits as early as 62, but if you do, they will be permanently reduced.  You will get 75% of your benefits at 62, compared to 100% at 66, and that reduction lasts the rest of your life.  Now, there is an option to delay benefits up until age 70.  This is something that very few people did in the past, but more and more people are looking at the value of this because for each year you postpone benefits, after your normal retirement age of 66 up to age 70, you earn an additional 8% per year up until age 70.  So, that means if you waited until age 70 to collect your benefits, they would be worth 132% of your full retirement age benefit.  Now, compare that to taking a reduced benefit at 62.  It’s almost double the amount.

Jim Lange:  Right.  So, you’re talking…one way is, let’s say whatever your benefit is, $25,000 a year or whatever it is, at 66, if you take it early, you’re getting 75% of that money, and if you wait until 70, you’re getting 132% of that money.  Plus, it’s not only just that exact amount, but you’re also going to get the cost of living adjustments.

3. Social Security vs. Private Annuities

Mary Beth Franklin:  Right.  When you delay getting benefits, when you do finally collect them, all the intervening cost of living adjustments for the years you didn’t collect are applied to that bigger benefit, and more importantly, going forward each year, Social Security beneficiaries receive a cost of living adjustment, and the larger your base benefit is, the bigger the dollar amount of that cost of living adjustment’s going to be.  I think we used to think in the past of Social Security simply as monthly income, and as people are realizing, so many baby boomers particularly are likely to live so much longer.  They need to think of Social Security as longevity insurance, money that will last the rest of your life, no matter how long you live, and will be cost of living adjusted.  Even people who are lucky enough to have traditional pensions from private industry usually do not have a cost of living adjustment.  So, this is an incredibly valuable benefit.

Jim Lange:  Well, it’s interesting that you said that because I have heard the analogy, and believe me, I’m not pushing insurance right now, but I have heard the analogy that there is a, in effect, longevity insurance product.  So, let’s say it’s age 65.  You plunk down $100,000.  You don’t get anything until you’re age 85, and then at age 85, you get $100,000 a year for the rest of your life.  If you die before age 85, your heirs get nothing.

Mary Beth Franklin:  Right.  I like to think of it as the ultimate roulette wheel of insurance.

David Bear:  Yeah, really!

Mary Beth Franklin:  But actually…

David Bear:  You Bet Your Life!

Mary Beth Franklin:  You Bet Your Life, or not!  One of the major insurance companies in the last couple years has actually come out with a modified version of that longevity insurance.  It’s essentially a deferred fixed annuity where you put up a certain amount of money, you know, in your fifties or even sixties, and collect at a later date.  Now, in their product, you wouldn’t have to wait until age 85.  You could select your date.  It might be ten years from now, or twelve years from now.  But it’s brilliant in that the biggest question financial planners and consumers can’t answer when they plan for retirement is how long am I going to live?  But if you had a product that you knew kicked in at a certain point, when you’re 80 years old, or 85 years old, you could say, “Well, the rest of my money only has to last until then.”  It actually makes retirement planning a lot more certain.

Jim Lange:  Well, I actually love that idea, but the point that I was going to bring up, no matter how wonderful that product is conceptually (and I do like it), from everything that I understand, the deal, if you will, because that’s what holding off on Social Security is a little bit, conceptually, but it is a much better rate than any private insurance company would give you.

Mary Beth Franklin:  Oh, absolutely.  Social Security is the cheapest annuity you could buy.  But the flip side of that, and people do worry, “What happens if I plan to delay and I die sooner?”  Well, frankly, you must be present to win.  So, if you think you have health issues, or longevity is not a family trait, you may not want to defer, or, frankly, if you need the money, maybe you had planned to work until 66, and you’re one of the many older workers that loses a job at 62, if you need the money, take it.  But if you’re in a position that you can afford to defer, either because you plan to keep working, your spouse plans to keep working, or you have other sources of income, delaying Social Security for someone who is healthy and who can afford it can be a great strategy.

Jim Lange:  Well, maybe I’ll be a little bit more specific because I agree with you completely, and here’s the analysis that I ran: let’s assume, for discussion’s sake, you start taking Social Security at age 62, and to compare apples to apples, I’m going to have you invest that money that you take in Social Security, and I’m going to assume that the investment earned 6%.  And then, I’m going to compare that to somebody who waits until 70.  So, obviously, the person who took the money at 62 is getting a big head start on their savings, where the person who waits until 70 basically has to wait until 70 to get anything, but then, because they are getting so much more per month, like you said, there is a break-even point, and using a bunch of assumptions that I’m not going to go through now, other than a 6% reinvestment rate, is I have the break-even number at about age 84.

Mary Beth Franklin:  In most cases, that’s going to work out, but I’m going to pick a few holes in your theory right there.  In the old days, pre-2008, that was a legitimate strategy: take your money early and invest it because you know you’re going to do better than Social Security.  But now, let’s fast forward to 2013 where, on your safe money, your risk-free money that you’re getting in a bank account or a CD or a treasury, you’re making less than 1%, and Social Security is saying, “If you postpone after age 66 up until age 70, you are guaranteed 8%.”  I think that’s a slam-dunk myself.

Jim Lange:  Well, so do I.  In fact, I point this out not to say that my analysis is accurate, because I want to poke some more holes in my analysis.  The other problem, and we’ll get to the marital issue later, but the other problem…and I’m going to quote somebody that I suspect that we both know, Larry Kotlikoff…

Mary Beth Franklin:  Certainly, yes.

Jim Lange:  …and it was right on this show, and he said, “Well, even if you use that 84 as a break-even, let’s take two possibilities: number one, you do die earlier.  Well, in that case, you’re dead.  You don’t have any more financial problems.  That’s it.  What you should be worried about is becoming old and not having sufficient income to live comfortably.”  So, even if you’re thinking, “Well, I might make it until age 80, or age 82,” he would say (these were his exact words), “Don’t think like an actuary; think like an economist.  Protect your older age.  Protect your income in the event that you do live a long time.”  And that made some sense to me.

Mary Beth Franklin:  Oh, I think it makes a lot of sense, and also going back to the comparison of buying a private annuity product from the insurance company versus delaying your Social Security?  The best deal you’re going to get from an insurance company assumes that when you die, so does your income stream.  The value of Social Security if you are married, or even, in some cases, if you’re divorced, or you have minor children, you die, there’s going to be survivor benefits.  And that is a value that is often overlooked and one of the things I love to talk about.  As we get into some of my strategies in a little bit, for married couples, they shouldn’t look at how much do I get versus how much do you get.  They should be looking at how do I maximize the survivor benefit for whoever’s left behind?

Jim Lange:  Well, I could not agree with you more, and it’s great to hear this.  Jane Bryant Quinn actually says that this is, to some extent, a woman’s issue because she assumes that, at least, actuarily, the man is likely to die first, and if he takes Social Security early at age 62, and then he dies somewhere along the way before his wife, that he is basically forever dooming his wife to a lower income stream for the rest of her life.

Mary Beth Franklin:  I couldn’t agree more because the way Social Security works is you get a benefit as a worker.  You get a retirement benefit, and, in some cases, you have dual income couples where they both have their own retirement benefit.  One of the great values of Social Security is for that non-working spouse, just for the fact that he or she is married, is entitled to a spousal benefit worth up to half of what the worker gets.  But if that worker dies, the survivor is entitled to 100% of what that deceased worker was either receiving or entitled to if the surviving spouse collects it at full retirement age, a little less if they collect it early.  So, this is what I really try to stress.  This is the value for a married couple, or, in cases of divorced spouses when they were married for at least ten years, people don’t realize that divorced spouses have many of the same benefits as married couples.

Jim Lange:  Well, we’ll get to divorce in a minute.  I’ll just say that when I was giving a workshop on Social Security and I explained about the divorce benefits, a woman said, “The no-good S.O.B. is finally good for something!”  Because she was able to collect on his…

Mary Beth Franklin:  I actually just wrote a column today.  As I just explained, a spousal benefit can be worth up to half of the worker’s benefit, whereas a survivor benefit can be worth up to 100%, and one advisor said back to me, “Well, I guess that means an ex-spouse is worth more dead than alive!”  I said, “No comment!”

Jim Lange:  Well, what you really said that I think is so important, and I really want to repeat it again to make sure that listeners get the concept is this: if you have an increased Social Security benefit, and let’s just say the husband and wife, and let’s use the old tradition where the husband has the higher earnings record, and the husband dies, then the surviving spouse is entitled to 100% of what he would have received.  And by delaying from age 62 to 66, or preferably even 70, the surviving spouse is then going to get a higher income for the rest of their life.  So, that is a great way to provide for your spouse without having to, in effect, buy insurance.

Mary Beth Franklin:  Right.  I usually recommend to married couples, and, of course, everyone’s situation is individual, but as a general rule of thumb, the higher earner, whether it’s the man or woman, because it&rrsquo;s gender-neutral, the higher earner should try to delay as long as possible because you are locking in not only the largest retirement benefit, but also the largest potential survivor benefit.

David Bear:  Well, this is a good place to take a quick break, and when we return, Jim and Mary Beth will continue the conversation.  Listeners, remember, you can call in with questions and comments at (412) 333-9385.


4. Apply and Suspend

David Bear:  And welcome back to The Lange Money Hour.  I’m David Bear, here with Mary Beth Franklin and Jim Lange.

Jim Lange:  So, during the first segment, Mary Beth made a pretty convincing case for holding off on Social Security, and recommending that, particularly, the person with the higher earnings record hold off, preferably, until age 70.  But I know Mary Beth has some pretty interesting Social Security strategies up her sleeve, so I thought maybe we could start this segment by talking about something that you have written about extensively called ‘apply and suspend.’

Mary Beth Franklin:  Right.  As a little background, I like to tell consumers and financial advisors that I consider 66 the magic age for three reasons: one, as we discussed, you would get your full benefits if you waited until 66 to claim.  Two, what a lot of people don’t realize is if they claim Social Security benefits early before their full retirement age and continue to work, they are going to be subject to earnings cap restrictions.  For 2013, that’s a mere $15,120 a year.  That means, earn more than that while you are collecting Social Security benefits before your full retirement age, and you start giving benefits back.  In my opinion, if you’re younger than full retirement age and plan to keep working, it just doesn’t make sense to collect early.  But the third most important part of why Social Security is the magic age, not only does the earnings cap disappear at that point, but you can engage in what I call ‘creative claiming strategies’ that you can only do if you wait until 66 to claim.

Jim Lange:  Well, why don’t you tell us a little bit about those strategies?

Mary Beth Franklin:  Well, there’re basically two different strategies, and then I’ll go through the profiles of the married couples and how they would apply.  One is called ‘file and suspend.’  What that means is for a worker who waits until full retirement age of 66 can say to Social Security, “I want to file and suspend.  That means, I’m filing for the purpose of triggering spousal benefits for my wife or husband, but I am suspending my own benefits so they grow to the maximum amount.  I’ll collect them later, up until age 70.”  The second strategy is called ‘filing a restricted claim for spousal benefits only.’  What that means is at 66 or older, I can say to Social Security, “Now that I am full retirement age, I want to file a restricted claim for spousal benefits only.  That means, give me half of what my spouse is getting, but don’t give my own benefits.  Let those keep growing up until age 70.”  So, let me give you some examples of who this would apply to and what it would mean in terms of money.  Does that work?

Jim Lange:  Yeah, it sure does, and boy, if I’m a listener and I don’t know this stuff, I’m taking notes frantically, and want to hear this information again because what you’re telling people can really save tens of thousands of dollars, and then when we get into the Roth IRA conversion discussion, if we combine the techniques, we’re talking hundreds of thousands of dollars.  But, please, go ahead.

Mary Beth Franklin:  It’s real money.  For example, I divide married couples into three profiles: Ozzie and Harriet, a traditional couple where one spouse, usually the wife, but again, it’s gender-neutral, has little or no earnings on her own.  So, her biggest Social Security benefit’s going to be as a spouse.  Then, I consider some couples who are dual income couples.  They both have earnings history, they’re both entitled to benefits on their own records, but one is probably the bigger earner.  And then, a third profile of what I call ‘the power couples,’ situations where both spouses have significant earnings history over their lifetime, and probably are both entitled to major benefits.  So, let me take you step by step how these strategies work, and it also assumes that the spouses are close in age.  We can talk after this of what happens when spouses’ ages are widely different.  But let’s assume you have spouses who are…let’s say the husband is 66 years old.  He’s full retirement age, and he heard our discussion.  So, he plans to keep working and delaying his Social Security benefit.  But his wife, who really doesn’t have much earnings history, would really like to have some Social Security benefits.  At 66, he could say to Social Security, “I want to file and suspend.”  Let’s say the husband is entitled to $2,000 a month Social Security benefit.  A spousal benefit is worth up to $1,000 a month.  When he files and suspends, he gets nothing at the moment, she gets $1,000 a month, and later, when he turns 70, he collects his bigger benefit.  Remember we talked about delayed retirement credits worth 8% a year?  So, at age 70, four years after his normal retirement age, rather than collecting $2,000 a month, he’s going to collect $2,640 a month (I have to do this fast.  I’m doing this all in my head.).  That means he’s got this bigger benefit now.  Each annual cost of living adjustment is going to be a bigger benefit applied to the cost of living adjustment.  And more importantly, if he dies first, which actually happens to most men, the wife is going to step up to 100% of what he received during his lifetime, 100% including those delayed retirement benefits.

Jim Lange:  And she’s getting $1,000 a month.

Mary Beth Franklin:  Exactly!  Now, that assumes she gets $1,000 a month if she collected at her full retirement age of 66, but she can get benefits as early as 62.  They’d be worth less.  Instead of $1,000 a month, she might get $700 a month.  But, still, it’s income coming into their household for all those years, and then he collects a bigger benefit later.  It’s a great strategy for what I consider a traditional couple.

Jim Lange:  Yeah, and, well, I’ll put some numbers to that after we talk about the Roth IRA conversions, and you know something?  As much as I’d like to talk more about Social Security, I did promise in the description of this show that we would at least talk about Roth IRA conversions some, because I know that that is also one of your strong areas that you have been writing about, and making calculations for, for years and years.

Mary Beth Franklin:  You know, you lead.

5. Best Time to do a Roth Conversion

Jim Lange:  All right.  Well, I appreciate it.  So, let’s just talk about…I think, by now, our listeners hopefully understand the general concept of a Roth IRA conversion, which is basically that you are paying taxes before you have to on a chunk of IRA, or 401(k), or 403(b) money, and, in return, that money grows income tax-free for the rest of your life, the rest of your spouse’s life, and the rest of your children and grandchildren’s lives.  So, it just makes sense that if you’re going to pay tax on money that you have not yet paid tax on (like an IRA), and that the income that you have to recognize from doing a Roth IRA conversion is going to be on top of your existing income, then it’s going to make sense to do a Roth IRA conversion when you are in a low tax bracket.  Is that fair?

Mary Beth Franklin:  Certainly.  Absolutely.

Jim Lange:  All right.  So, let’s forget about the issue of Social Security for a minute.  Typically, the best time to do a Roth IRA conversion, if you’re going to do a certain amount over a limited number of years, is typically after you retire, so you don’t have your income from your job or your wages or your self-employment, but before age 70 ½ so you don’t have your income from your minimum required distribution and your Social Security.

Mary Beth Franklin:  That’s right, it’s best to do it while your income is lower and before you’re subject to the required distributions.  Now, two caveats I would add to that, and for some people, a Roth IRA conversion, particularly those who have legacy issues that want to pass tax-free money onto their children and grandchildren, it’s a great idea, assuming they’ve got the money to pay the taxes.  But there are two caveats I would note: one is in the year you make the conversion, or if you spread it over several years, in the years you make the conversion, that money that you convert from a traditional IRA to a Roth IRA looks like, for tax purposes, regular income, and certainly, you have to pay income tax on that converted amount.  But it does two other things.  It also boosts the amount of money you’d have to pay taxes on concerning your Social Security benefits in that year, and, more importantly, these days, higher income retirees are paying higher premiums for Medicare.  So, that’s another thing to keep in mind, that if you are doing a Roth IRA conversion during your retirement years, you may, at least temporarily, be paying higher taxes on your Social Security benefits, and also higher Medicare premiums.

Jim Lange:  All right.  Well, I’m going to get to that issue because that brings in a couple pretty interesting strategies.  But just to quantify this, by the way, I’ve run some numbers, not even assuming that you make the ideal timing of Social Security, but what I have concluded…and again, I actually do two and six and even eight hour workshops just on Roth IRA conversions, but the conclusion that I came to, in today’s dollars, not measured in total dollars, but in today’s dollars, if you make a Roth IRA conversion of $100,000, that twenty years from now, you’re better off by $28,000.  If you then do the conversion and die, compared to somebody who didn’t do the conversion, and I’m taking into account the money that you paid or you gave up in income taxes, you’re still better off by $160,000, and if a grandchild ultimately inherits that money, that grandchild is better off by $838,000.

Mary Beth Franklin:  Oh, it’s an incredible gift to future generations because what people don’t realize is, yes, you’re paying income taxes up front on the amount you’re converting, but all that money going forward grows tax-free.

6. Increased Taxation of Social Security or Medicare Part B.

Jim Lange:  Which is tremendous.  All right.  So now, and again, you know, I love to talk about Roths and we could talk about them for a long time, but what I would really like to get to before we close out tonight’s show is you said that if you do a Roth IRA conversion, that that’s going to increase your income, which might ultimately increase the taxation of your Social Security or Medicare Part B.

Mary Beth Franklin:  Umm-hmm.

Jim Lange:  So, let’s just concentrate for a minute on if you do a Roth IRA conversion and you’re in a low tax bracket, and you are adding the percentage of how much money you have to pay tax on for your Social Security.  So, while you think you might be doing a conversion just at 15%, that when you take into account the additional tax on your Social Security, you might be at 30% or even 40%, in which case, the Roth IRA conversion may not make sense if you’re increasing the tax on your Social Security.

Mary Beth Franklin:  But, as you had pointed out, it’s not an all-or-nothing deal.  You can do this over several years to stay within, you know, a tax bracket or two without making it too onerous.

Jim Lange:  All right.  I’ll tell you what I am getting to.  And let’s forget about apply and suspend for a moment.  Let’s just talk about the straightforward situation where, without a spouse, you gave a pretty convincing case to hold off on Social Security until you are 70.  What if we combine the ideas of doing a Roth IRA conversion, and we want to do it at a low income tax rate, and we don’t want to increase the tax on our Social Security, so what we could consider is doing a Roth IRA conversion and combining that technique with holding off on Social Security.

Mary Beth Franklin:  That makes sense because your Social Security would have been added income that could be potentially taxed, and if you’re deferring your Social Security, that’s less income that’s coming in.

Jim Lange:  And, to me, that introduction, and we’ll probably get into a few details after the break, but that introduction of the synergy between holding off on Social Security, or perhaps doing apply and suspend like you had mentioned, and doing a series of Roth IRA conversions can make people a lot of money.

David Bear:  Well, let’s take that break now, and when we return, Jim and Mary Beth will continue the conversation.


7. Synergy between Social Security Collection and Roth Conversion

David Bear:  And welcome back to the final segment of today’s Lange Money Hour, with Jim Lange and Mary Beth Franklin.

Jim Lange:  Before the break, on the first segment, we were talking about the value of waiting longer to collect your Social Security, and the fact that you would be getting 132% if you waited until age 70, then your full retirement Social Security if you take it at 66, and that you would only get 75% if you took it at 62.  Then, Mary Beth talked about some of the advantages of a technique called ‘apply and suspend’ and how important this is for surviving spouses and the family as a whole.  Then, we talked a little bit about Roth IRA conversions, and now, what I’d like to do, if it’s okay with you, Mary Beth, is talk about the synergy of holding off on Social Security and doing a series of Roth IRA conversions while you are waiting to get your highest Social Security benefit.

Mary Beth Franklin:  And I think that makes a whole lot of sense because, on one hand, you are converting to a Roth IRA when you’re in a lower income tax bracket, partially because you’re deferring to collect Social Security later, and then the byproduct of that is you end up with a much bigger Social Security benefit.

Jim Lange:  Right, so you’re getting a bigger Social Security benefit.  Now, again, I’m a little bit of a numbers runner.  Well, to be fair, a lot of a numbers runner, and also, to be fair, it was actually not done by me, but by Steve Kohman, but what we did was we compared two people, one who took Social Security at 62, and still did a series of Roth IRA conversions up to the top of the 15% bracket, and then we compared that person to somebody who waited until age 70, did the apply and suspend, and the difference, when they were even just at age 86, the difference in today’s dollars, not future dollars (in future dollars, it would be much higher), was $219,000.  And all you need is for one person to live that long.  You don’t need both spouses.  So, think about this: by doing a series of Roth IRA conversions and holding off on Social Security, that you’re better off by $219,000, which is really significant.  And I think one of the nice things that I’ve always liked about your work is you haven’t tried to, you know, do tricky investments where somebody can take a risky investment and get more money, but your strategies have typically just been more money no matter how you’re investing the money.

Mary Beth Franklin:  Right, and let me add one other thought of the value of Roth conversion that people really haven’t thought about up until now, particularly for listeners who might be in a higher income bracket.  They may be aware that Medicare benefits are now means tested.  People in higher income brackets pay a higher monthly premium for Medicare Part B.  That covers your doctor’s visits and outpatient services.  Most people are paying about $105 a month.  Higher income people could be paying over $300 per spouse per month just for Medicare Part B, plus they’re paying for a Medigap private insurance policy, plus they’re paying for a Medicare prescription Part D policy.  It really adds up, and when Social Security and Medicare are looking at what counts as income for the purposes of figuring how much of a premium you’re going to pay, there are now only three sources of tax-free income in retirement for those purposes: one is distribution from a Roth IRA, two is distributions from a health savings account that you’ve built up during your working career, and three is cash value life insurance distributions that you might take as a loan or a withdrawal.  So, I think, for higher income people, they may really want to look at Roth IRA conversions as a way of keeping their healthcare costs in retirement down by reducing the amount of premiums they’re paying.

Jim Lange:  Well, that is another benefit that I didn’t even quantify, and what I was going to say is if the husband and wife are $219,000 better off, and then they eventually die and leave money to their children, that their children are better off, even in today’s dollars, by more than $500,000 because the tax-free features of the Roth IRA conversion will…unless they change the law, and that’s a whole other…

David Bear:  To a stretch IRA, yeah.

Jim Lange:  Yeah.  That’s a whole other topic.  Actually, Ed Slott and I are going to cover that topic in depth on November 20th, the potential death of the stretch IRA, which, I’m afraid, we’re not going to have time to talk about tonight.

Mary Beth Franklin:  Yes, but it also shows that’s why you want to do it now.

Jim Lange:  Well, I think that that’s a good point, and the other thing that a lot of times people don’t recognize for the value of the Roth IRA conversion is that it will also reduce, well, most likely, PA inheritance tax, because most people are not paying federal estate tax anymore, but it actually…

Mary Beth Franklin:  But you’re right.  Pennsylvania is one of those few states with its very own inheritance tax, and it can bite.  It’s a great state to retire in and not a great one to die in.

Jim Lange:  Well, I think that’s right.  And interestingly enough, so if you work in Pennsylvania, you don’t have to pay income tax, or, looked at another way, you get a tax deduction when you put money in your retirement plan, your 401(k), your 403(b), etc.  But then, when you retire and you receive those monies, they’re not taxable.  And that’s the same with the city of Pittsburgh.

Mary Beth Franklin:  Umm-hmm.  And it’s one of the few states that does not tax IRA distributions.  It’s pretty significant.  And you can see, what, you know, many people don’t realize that second only to Florida, Pennsylvania has more people 65+, and the reason is, people tend to move to Florida to retire, but people in Pennsylvania tend to stay there.

Jim Lange:  Well, I think that’s a good point, and you know…and I better watch our Pittsburgh-Philadelphia rivalry, but Pittsburghers have a history of digging in and staying for good.  But Pennsylvania is a very good state to retire, and what you don’t want to do (which is what one of my clients did) is they spent their whole career in Pennsylvania, and they had to pay Pennsylvania income tax on all the money that they put into their retirement plan, because they didn’t get a break, and had they stayed in Pennsylvania, they would’ve enjoyed tax-free, not only a return of their money, but also the growth on it.  But then, they went and moved to California, which taxes IRAs.  So, they got it coming and going.

David Bear:  Or going and coming, I guess.

Mary Beth Franklin:  And I believe that California is one of the few states that also taxes Social Security benefits.  It’s a high ouch income tax state!

Jim Lange:  Yeah.  It’s a beautiful state and I love going there to visit, but probably not a great place to retire.

Mary Beth Franklin:  One other point on Roth IRAs, and I know it’s really difficult for people to cough up the money to pay the taxes before they really have to.  So, if that sticks in your craw, the one thing you can do is encourage your kids and grandkids, who have any kind of working income, to start saving early in a Roth IRA, because that gives them decades of tax-free growth.  And as I often write to young people, and I’ve got two sons in their twenties myself, I say, “If you don’t plan for retirement, retirement’s going to look a lot like college.  You’re going to be eating a lot of Ramen noodles, but you won’t be as cute, and when they ID you, it’s going to be for your Walgreen’s senior discount.”

Jim Lange:  So, let me ask you this: so here you are, one of the top financial writers in the country, and I assume, for discussion’s sake, that your children are at least reasonably intelligent, do they listen to you, or do they go their own way anyway?

Mary Beth Franklin:  Oh, they don’t listen to me at all.  That’s why I write for other people’s kids!

Jim Lange:  Well, maybe what you should do is, I actually have a client, and he gave me permission to tell this story.  His name’s Walt Dollard.  He’s a very, very smart man, a retired engineer…actually, he kind of ran a good chunk of the nuclear division at Westinghouse, and what he said…so, he wanted his kids to have all the up-to-date best strategies regarding IRAs and retirement plans and Roth IRAs, etc.  So, he gave each one of his kids my book and said, “Here’s the deal.  If you want to inherit any of my money, you have to read this book.”

Mary Beth Franklin:  What a great plan!  Send me two copies!

Jim Lange:  Now, I don’t know if you play hardball with your kids like that, but he did, and I think maybe that might be something that you should consider for your kids!

Mary Beth Franklin:  Sold!

Jim Lange:  And maybe it’d be easier to have them read somebody else’s book rather than yours, although, frankly, your information has always been stellar, and to me, one of the things that would be really interesting to me is to…and I don’t know if there’s a copyright problem with this or not, but to get some of the top articles and top insights that you have written throughout the years for Kiplinger’s, Investment News and others, and have some kind of compilation.

Mary Beth Franklin:  Well, once I finish taking my CFP exam next week, I’ll be working on a Social Security claiming strategies book.  So, I’ve told advisors and consumers to stay tuned.

Jim Lange:  Well, you know, at the risk of duplicating a program, after that comes out, that might be a very, very interesting discussion.

David Bear:  Follow up, yeah.

Jim Lange:  Well, let me ask you this: so, we’ve talked about Social Security, we’ve talked about Roth IRA conversions, and we talked a little bit about the synergy of combining the idea of holding off on Social Security and doing a series of Roth IRA conversions when you are close to 70.  And we’re wrapping up, but one of the things I sometimes like to do is to just kind of throw out a general question where you have maybe two minutes to say what haven’t we talked about that you think is important for our listeners to know?

8. Social Security Benefits After a Divorce

Mary Beth Franklin:  I think for people who are married and divorced, if they were married for at least ten years, many of them do not realize they are entitled to the same Social Security benefits on the ex-spouse as if they were still married.  When I go around the country talking to consumer groups and financial advisors, I see this shock and awe in the audience about, “You mean I can collect on my ex?”  It’s either glee or revenge, depending how you look at it.

David Bear:  And that doesn’t take away from the…if there’s another spouse?

Mary Beth Franklin:  It does not affect…let’s say, you are married for ten years, you are now divorced and your ex-husband has remarried.  You, as the ex-wife who is unmarried, can collect on your former spouse’s benefit even if he is currently married, and it does not take away from that current spouse.

David Bear:  Wonderful.

Mary Beth Franklin:  The two things I would say is yes, you can collect benefits as early as 62, but the smartest strategy is wait until age 66, file a restricted claim for spousal benefits only, which says ‘give me half of what he’s getting,’ and wait until 70 to collect your own enhanced benefit.

Jim Lange:  Well, I think that that is some great advice, and I know that you have other Social Security strategies that we didn’t get to, but Mary Beth, I want to thank you.  You have been terrific.  For people who are interested in reading more about Mary Beth’s strategies, I would strongly encourage people to go to www.investmentnews.com, that has a lot of Mary Beth, and then, Mary Beth made an unprecedented offer to actually answer individual e-mails, not promising to get to all of them, and people can ask her a question at…what was your e-mail again?

Mary Beth Franklin:  It’s mbfranklin@investmentnews.com.

Jim Lange:  Well, thank you again for being on the show.  You’ve been a terrific guest.

Mary Beth Franklin:  Great to talk to you, Jim, and I want two copies of that book!

Jim Lange:  All right.  They’ll be in the mail tomorrow.

David Bear:  Well, and I want to say thanks to listeners for tuning in to this edition of The Lange Money Hour, Where Smart Money Talks, and thanks also to the Lange Financial Group’s program coordinator, Amanda Cassady-Schweinsberg, and Dan Weinberg, our in-studio producer.  As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and you can always access the archive of past radio shows, including written transcripts, on the Lange Financial Group web site, www.paytaxeslater.com.  And finally, please join us for the next new edition of The Lange Money Hour in two weeks on Wednesday, November 20th, when, as Jim mentioned, we will welcome back nationally renowned IRA expert, Ed Slott, to the show.




jim_photo_smJames Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.